Victims of the Fed: How a year of rate hikes cratered stocks - and fueled the demise of FTX and Silicon Valley Bank
- A year ago, the Federal Reserve started hiking interest rates at its fastest pace in recent times.
- Its aggressive campaign has pushed up borrowing costs, fueling selloffs in stocks and bonds.
It's one year since the Federal Reserve started raising interest rates at the fastest pace in recent history — and what's followed has been a roisterous 12 months for markets and a couple of once-promising companies.
The US central bank has lifted borrowing costs from near-zero to just under 5%, starting with its initial raise on March 16, 2022. It's the fastest pace of tightening in decades, with policymakers making four outsized hikes in a row.
The Fed's aim was to crush soaring inflation — but it has claimed some high-profile scalps along the way.
Lender Silicon Valley Bank failed and FTX imploded after borrowing costs rose. Stocks and US Treasury bonds plummeted as the era of easy money came to an end, though the US dollar went on a historic tear.
Fed policymakers say they're not done yet, with inflation only just starting to cool down. Here's how their campaign has driven some of the biggest market moves of the past year.
Between the early days of the COVID-19 pandemic and the end of 2021, US stocks went on a tear. Low borrowing costs and loose fiscal conditions helped drive up share prices.
But when interest rates rise, future cash flows fall for companies. That's because it becomes more expensive for them to borrow money.
So the Fed's year of rate increases has crushed equities.
The S&P 500 fell 18% between March and October last year. Although it's pared some of those losses, the benchmark US stock index is still down 12% from a year ago. Meanwhile, the tech-heavy Nasdaq Composite has crumbled 16% since the hikes started.
"Stocks had become reliant on low interest rates as a crutch," Dan Kemp, CIO at Morningstar Investment Management, told Insider.
"If valuations had been lower, then the reaction to the Fed's rate hikes would've been far less severe."
It's been an even tougher year for fixed income investors. When interest rates rise, traders can find better returns by putting their cash in a savings account than by owning bonds, so prices tend to plunge.
Yields, which rise when prices fall, have soared over the past 12 months. Yields on 2-year US Treasury notes have added 209 basis points to over 4%, while yields on 10-year notes are up 130 points to just under 3.5%.
Meanwhile, Bloomberg's Global Bond Index — which tracks the price of fixed income investments across the world — fell into its first bear market in over three decades in September, after prices fell by over 20%.
"It's clearly been a very tough year for bond investors — the toughest that they've seen for decades," Kemp said. "We're only now at a point where prices look closer to fair value."
FTX and Silicon Valley Bank
The Fed's rate-hiking has fueled two of the largest corporate collapses in US history –of crypto exchange FTX and tech-focused lender Silicon Valley Bank.
Rising borrowing costs plunged cryptocurrencies into a brutal bear market, with bitcoin's price plummeting 39% over the past year. FTX boss Sam Bankman-Fried allegedly responded by using customers' money to prop up his trading firm Alameda Research – and now he's in the US awaiting a criminal trial on eight counts including fraud.
"Although this has been charged as fraud, you can argue that a Fed hiking cycle exposed it, as it reversed the enthusiasm for crypto, which ultimately exposed the corporate wrongdoings at the company," Deutsche Bank managing director Jim Reid said in a research note.
Meanwhile, SVB collapsed last week – and rising interest rates were a huge factor in its demise. SVB lost $1.8 billion on its bond portfolio as fixed income prices plummeted, while its deposit base dried up because of tech startups' growing reluctance to list on the stock market.
"In essence, the Fed is causing this bank run," markets guru Larry McDonald told CNBC last Friday
Not all traditional assets have suffered over the past year.
The US Dollar Index racked up a 16% gain between March and September. And the index, which tracks the greenback's value against six other currencies, is up 7% since the Fed's first hike.
Rising interest rates in a particular country tend to strengthen its currency, because they attract foreign investors seeking higher yields.
"It's been a quite exceptional year for the dollar as the Fed has pursued the most aggressive monetary tightening in decades," OANDA market analyst Craig Erlam told Insider.
"The US likely has further to go on interest rates and will likely end with a higher terminal rate than the bulk of its peers, which could support the dollar further," he said.
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