Zephyr Financial Solutions

Investors Applaud the End Of Hiking Cycles

Navigating the End of Hiking Cycles:

The Federal Reserve's actions and statements have played a pivotal role in shaping market performance since the pandemic's peak, and this influence is expected to persist. In this era of economic uncertainty, it has become increasingly crucial for financial advisors to prioritize the construction of well-diversified investment portfolios tailored to their clients' risk tolerances and investment objectives. As the Fed's monetary policies evolve, advisors must stay nimble, aligning their strategies to not only weather the end of hiking cycles but also seize opportunities for optimal portfolio growth. Explore strategies to navigate these uncertain times and safeguard your clients' financial futures.

Equity markets have been impacted by the Federal Reserve (Fed) since March 2022, with the central bank aggressively raising its key interest rate from 0.25% to 5.25% to combat inflation. The S&P 500 index fell by -2.41% between March 2022 and April 2023 due to these monetary restrictions. The return could have been worse if not for a +9.17% return year-to-date through April.

Traders currently believe there's a 71% chance that the Fed will keep rates unchanged at the June 14th FOMC meeting, with 80% probability of rate cuts by year-end. Historically, equities have performed well in the 12 months following the end of a rate hiking cycle, with an average +12.2% return during the past 13 cycles. The last rate hike cycle like the last, between July 2004 and June 2006, with rates rising from 1.00% to 5.25%.

By utilizing a wealth management software application, analysts studied market performance following the end of the 2004 - 2006 hiking cycle. The S&P 500 index recorded a +20.59% return between July 2006 and June 2007, with communication services, materials and energy sectors performing well. Even value stocks outperformed growth stocks during that hiking cycle.

The 2015 - 2018 hiking cycle ended in December 2018 correlated with its predecessor, with the S&P 500 index posting a +31.49% return between January 2019 and December 2019. Top performing sectors during this cycle included Information technology and communication services, but growth stocks outperformed value stocks.

As Fed's actions continue to drive market performance, traders are starting to bet on two more rate hikes this year (July and September) as economic data stabilizes. Financial advisors should focus on creating diversified investment portfolios aligned with their clients' risk tolerance and investment objectives.

Having access to portfolio analysis tools like Zephyr can be essential for effective portfolio management, as they allow investors to monitor and analyze their investment portfolios efficiently for clients. Utilizing such tools helps in making informed decisions to optimize investment strategies and achieve better outcomes in the ever-changing financial market landscape.

Tags: Investment Research, Investment Analysis Tools