Can the U.S. equity rally hold if the Federal Reserve hikes?
Shechar Dworski, PhD, CFA – Head of Economics and Director, Macro Strategy
The U.S. Federal Reserve held rates steady at its July 29 FOMC meeting, as Kevin Warsh doubled down on the notion that less Fed communication is ultimately the best thing for markets.
That defers the question rather than settling it. With inflation at 3.5% and markets already pricing hikes for later in 2026, the scenario that matters is still ahead.
Here is why it matters: In the eight instances since the late 1950’s when the Fed had cut into warm inflation one year, and then reversed into hikes the following year, the S&P 500 averaged -5% return and finished positive only 38% of the time (compared with 94% for the cutting phase alone).
The worst outcomes were 2022 (-19%), 1973 (-17%), 1977 (-12%), 2000 (-10%).
Additional adverse events made these tightening cycles even worse: the 1973 oil embargo; the 2000 tech bubble concentration unwind; and the 2022 inflation surge and subsequent tightening cycle (the fastest in 40 years).
The upcoming year may be unfolding in a similar fashion, and some of the same extenuating factors may be present today as well:
A Middle East petroleum supply shock as a result of the Iran war.
Extreme concentration into large-cap Tech, with CAPEX near century-high readings.
Inflation remains well above target, and the market expects the next move to be a hike.
A hold does not settle it - the hike is likely still coming.
What sank markets in the worst years was hikes landing alongside extenuating factors such as an energy shock and an over-concentrated market, and that combination is in place today. This week's pause delays the test, not the result.
DISCLOSURE
All data sourced from Picton Mahoney Asset Management Research unless otherwise cited.
This material has been provided as a general source of information, is subject to change without notification and should not be construed as investment advice. This material should not be relied upon for any investment decision and is not a recommendation, solicitation or offering of any security in any jurisdiction. The information contained in this material has been obtained from sources believed reliable, however, the accuracy and/or completeness of the information is not guaranteed by PICTON Investments, nor does PICTON Investments assume any responsibility or liability whatsoever. All investments involve risk and may lose value. This information is not intended to provide financial, investment, tax, legal or accounting advice specific to any person, and should not be relied upon in that regard. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional.
This material contains “forward-looking information” that is not purely historical in nature. These forward-looking statements are based upon the reasonable beliefs, expectations, estimates and projections of PICTON Investments as of the date they are made. PICTON Investments assumes no duty, and does not undertake, to update any forward-looking statement. Forward-looking statements are not guarantees of future performance, are subject to numerous assumptions, and involve inherent risks and uncertainties about general economic factors which change over time. There is no guarantee that any forward-looking statements will come to pass. We caution you not to place undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement made.
Any review, re-transmission, dissemination or other use of this information by persons or entities other than the intended recipient is prohibited.
Commissions, trailing commissions, management fees, performance fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns.
