Buy a Post First Fed Rate Hike Dip - BofA

Bank of America Technical Research Strategist Stephen Suttmeier has discussed the S&P 500 outlook for 2022, a year that will likely be dominated by several rate hikes from the Fed.

The strategist says that history suggests SPX “can take a hike.”

“US equities tend to struggle just after the first rate hike of a Fed tightening cycle, which could come as early as the March FOMC meeting, but the data suggest buying a dip. The SPX has negative average and median returns for the one, two, three and four month periods after the first rate hike prior to turning positive for the five month period after the initial hike. If March is the month of the first rate hike, this suggests corrective risk for the SPX from April into July ahead of some stability in late 3Q. While average and median SPX returns are positive for the five, six and 12 month periods after the first hike, they lag the historical returns for these periods back to 1962,” Suttmeier said in a client note.

Suttmeier has also analyzed the SPX performance in the midterm year of the US Presidential Cycle. History suggests the average and median midterm year corrections for the SPX are 20.8% and 19.8%, respectively.

“The SPX stalled near 4800 in early January. We believe that US equities are in the later stages of the cyclical bull market from March 2020. If the 4800-5000 area contains any further upward probes on the SPX, or if we have already seen the high, the average and median midterm year corrections suggests SPX 4000-3800. The SPX has retracements near 4000-3800 that we have highlighted as important downside levels for 2022,” he added.

However, history also shows that midterm-year corrections are usually followed by “solid rallies.”

“Averaging the dates of the peak and the correction low show April as the timing of the average peak and August as the timing of the average low of the midterm year correction. Midterm year corrections average 77 trading days (median of 62 days), but the best part of the Presidential Cycle is from the midterm year low through Year 3 of the cycle. Rallies off the low into yearend can be strong and have an average return of 17.6% (13.3% median). The risk of a dip and then a rally in the midterm year is aligned with the path that the SPX can take after the Federal Reserve begins a rate hiking cycle as highlighted below,” Suttmeier concluded.

By Senad Karaahmetovic | [email protected]

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