Markets across the globe tanked on Thursday after the US Federal Reserve raised its key interest rate by 75 basis points, the highest since 1994. However, historical data however suggests that markets have recovered over three to six months after the rate increases, a report by Economic Times stated.
As per the report, since 2015, the US Fed has increased interest rates 11 times, excluding the one on Wednesday, and of those 11 occasions, the Nifty has declined only four times over one month and three times over three months.
Indian equity benchmarks also slumped to 13-month lows on Thursday, failing to hold on to initial gains, as nervousness set in across investors globally after the Fed announced the biggest hike in the key interest rate in almost three decades. Sensex failed to hold on to the early gains and plummeted 1,045.60 points or 1.99 percent to settle at 51,495.79- the lowest in over 12 months. NSE Nifty also plunged 331.55 points or 2.11 percent to close at 15,360.60.
On seven occasions, the Nifty gained one month after the increase in Fed rates. Dow Jones rose in 7 of those 11 instances over the next one month and eight times over three months, noted ET.
“Generally, rate hiking cycles begin with a strong economy which helps corporate earnings growth. During this cycle, stocks, especially from cyclical sectors such as materials, industrials, and energy, will perform well”, said G Chokkalingam, CEO, Equinomics Research & Advisory told the market daily.
However, he added that rising rates may impact growth stocks.
For instance, between December 2015 and December 2018, the Fed increased rates by 200 basis points. During this period, the Nifty gained nearly 40 percent, while the Dow Jones index gained 31 percent, pointed out ET. Also, between March and December 2018, the Fed rate went up by 100 bps, and the Nifty gained nearly 9 percent, it noted.
Even after the 75 bps rate hike, experts believe that the US may need to act more aggressively to bring inflation under control. Most expect that Fed rates could reach up to 3 percent by next February.
Jerome Powell says Fed could hike rates by 0.75 again in July. He also said that Fed has tools, and 'resolve' to bring inflation down. “I do not expect moves of this size to be common, but an increase of 0.5 or 0.75 percentage points is likely at its next meeting," Powell said.
