The Newest Rate-Hike Cycle Has Begun

Kevin Warsh was supposed to be a puppet. But his recent decision shows he has a mind of his own...

President Donald Trump hasn't been quiet about wanting lower interest rates. He berated former Federal Reserve Chair Jerome Powell for months for refusing to give in to his demands.

Then, in comes Kevin Warsh, Trump's handpicked replacement.

We expected the new Fed chair would fall in line. And we weren't alone. Many folks assumed his appointment would lead to lower rates.

But on September 16, the Fed voted unanimously to hike rates instead of lowering them. It was the Fed's first hike in more than three years. And it leaves plenty of questions in its wake.

An obvious one is what it means for stocks. The answer might surprise you... because this isn't a deadly blow to the bull market.

Instead, we should expect stocks to keep rising in the coming months.

Stocks Can Keep Rallying After the Fed Hikes Rates

The Fed made its decision for good reasons. The economy is growing fast, and inflation remains elevated.

Interest rates are the Fed's main tool to fight inflation. That's why it increased the federal-funds rate by 25 basis points, bringing the target range to between 3.75% and 4%.

Higher interest rates often worry investors. They increase borrowing costs and create competition from the bond market. But in reality, when the Fed begins a new round of rate hikes, stocks don't perform the way you'd expect...

To see it, I looked at each initial rate hike over the past 40 years. We've seen eight similar setups in that time period. Here's what happened next...

If you assume the first rate hike will kill a bull market, you've got it all wrong.

Instead, stocks tend to outperform in the following six months, with a 5.6% return. And they barely underperform over the next year, returning 8.6%.

So while this doesn't tell us to back up the truck and buy, it's hardly a bad sign for stocks. Plus, the market was higher a year later 100% of the time.

Even knowing this, though, we should focus our analysis on a more specific period...

That's because right now, rates are rising only a few years after the Fed completed a major hiking cycle in 2023 – in the late stages of a major bull market. That sounds a lot like the 1990s.

The Fed hiked aggressively in 1994 and 1995. Then it cut rates... only to hike them again in 1997 and 1999. Here's what happened after those two rate hikes...

These results leave us with one question: Is today more like 1997... or 1999?

In other words, do we think the bull market can run for several more years, with massive gains ahead... or that it's near the peak, with the biggest gains behind us?

We've shared a lot of essays in DailyWealth about the opportunities in the AI boom. And my research shows that it still has years to run. The fundamental drivers are still in place, and investors are far from euphoric. That suggests today's setup is more like 1997 than 1999.

If I'm right, this rate hike is nothing to worry about.

Even if I'm wrong, that doesn't mean the top is in. Stocks still rose after the 1999 hike.

Whichever scenario we're in now, history shows you should stay invested in today's bull market.

Good investing,

Brett Eversole