The Federal Reserve has officially begun its current interest rate hike cycle, and the market's focus has shifted from "whether to raise rates" to "how much more will be raised next." The latest interest rate forecast indicates that most officials expect further increases within the year, and the market has already factored in approximately 3 more rate hikes in the future. Meanwhile, oil prices are once again approaching $100 per barrel, with rising energy and transportation costs becoming significant factors driving recent inflation.

However, compared to 2022, the context for this tightening cycle is distinctly different. At that time, the Federal Reserve had not yet started raising rates, but the market had already factored in 8 rate hikes; in contrast, prior to the current increase, the market had factored in about 3.8 hikes. More importantly, current inflationary pressures are primarily concentrated in supply-side factors like oil prices, with core CPI excluding energy still declining year-on-year, showing no significant widespread diffusion.

First Three Months Post-Rate Hike May Face Pressure: S&P 500 Average Maximum Drawdown of About 5.4%

Looking back at past Federal Reserve rate hike cycles, in the first week following the first rate increase, U.S. stocks typically remain relatively strong, but then usually begin to decline. On average, the S&P 500 drops about 2.5% a month later, falls about 5% two months later, and declines about 5.4% three months after; from the fourth month, it gradually recovers, and by the sixth month, it turns into a slight increase. In the previous 5 rate hike cycles, the S&P 500 has been above its starting point a year after the first increase in 4 of those instances.

2022 was a clear exception. At that time, the market had priced in significant tightening in advance, and the S&P 500 dropped 8.5% over the next six months, still down 7.1% twelve months later. In contrast, the current market expectation for subsequent rate increases is much closer to the Federal Reserve's policy path, and given that current inflationary pressures are more focused on supply-side factors like oil prices, this cycle seems to be a relatively orderly adjustment in pricing for oil and the bond market, rather than the abrupt tightening seen in 2022.

Gold Up 11.5% in Six Months, Bitcoin Up 7.9%: Oil Prices May Become Key Variable in Next Phase

Historical data shows that six months after the first rate hike, the median return for U.S. stocks is +1.7%, essentially recouping prior losses; gold rises 11.5%, Bitcoin increases 7.9%, bond yields rise by 44 basis points, while the dollar weakens. This suggests that the market may not continue to be pressured by the Federal Reserve's hawkish stance, with the real key being the future trajectory of rate hikes and whether inflationary pressures can be alleviated.

One of the biggest variables currently remains oil prices. If energy prices continue to rise and spill over into other components of inflation, the Federal Reserve may need to maintain a stronger tightening approach; however, if oil prices peak and then fall while core CPI continues to improve, the Federal Reserve will gain more room to slow the pace of rate increases. Additionally, the midterm elections may also influence subsequent market trends, with current predictions showing the implied probability of the Democratic Party controlling both chambers of Congress at about 61%. If oil prices begin to decline after the elections, this could also reduce a significant source of market volatility.

Overall, this rate hike cycle exhibits clear differences from 2022: market expectations for subsequent rate hikes are closer to the Federal Reserve's policy path, with recent inflationary pressures predominantly centered on the energy sector. Historical performance indicates that the first month following the initial rate hike is an important observation window; if risk assets can remain relatively stable, the drawdowns in the second and third months are usually relatively limited, with the market often beginning to recover from the fourth month onward and turning upward by the sixth month.

Moving forward, the trajectory of oil prices and the results of the midterm elections will be two important variables to watch in the next six months. If oil prices decline, the Federal Reserve will have more room to slow the pace of rate increases; historically, a slower rate hike path has typically been more favorable for stocks, gold, and Bitcoin, while exerting pressure on the dollar.

The above opinions are partly derived from BIT on Target, Contact Us for the complete report of BIT on Target.

Disclaimer: The market carries risks, and investments require caution. This article does not constitute investment advice. Digital asset trading can involve significant risks and volatility. Investment decisions should be made after carefully considering personal circumstances and consulting financial professionals. BIT is not responsible for any investment decisions made based on the information provided herein.

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