With the first Federal Reserve rate hike expected in March, I looked at US equity market performance in the wake of previous policy lows, as shown in Figure 1. In the three months following the first tightening, we’ve typically seen the broad market weaken and defensive names dominate. Looking further out toward the 12-month mark, total returns have tended to improve.
Observations on specific sector results
I think a few details in the table are notable:
- Within cyclical sectors, energy, financials, and materials held their own in the immediate aftermath of the first tightening.
- Real estate and utilities stood out for their extremely strong performance in the last two expansions, as both were characterized by falling rates.
- Health care did well in two of the three expansions following the first tightening (the sector also screens well for being low duration and low beta).
I’d also note that defensive sectors have tended to do better in the 12 months after a Fed move than in the 12 months leading up to the move.
With all that said, this expansion is different for a lot of reasons, including the Fed’s use of both balance sheet and interest rates as policy tools, which makes extrapolation challenging.