The market-boosting monetary policies implemented during COVID — which sent the market to record highs — is coming to an end.

Yesterday, the US Federal Reserve signaled plans to raise interest rates and end its bond purchases in March.

What’s the big deal? The rate raise was long expected but there’s still the question of how many times the Fed will do so — and how big those increases will be.

• Rising interest rates may be the lesser of two evils — compared to rising inflation.
• While the market didn’t expect a raise in this meeting, it’ll be fair game in March.

Historical data: With interest rates on the horizon, how can investors expect the market to perform? Surprisingly well — just after some bumpy months.

• S&P 500 returns were positive in 11 of the past 12 rate increase cycles — with an average 9% return.

The US midterm election will also be a big factor to watch in the coming year. Since 1950, the S&P 500 averaged a 17.1% drop from market highs to market bottoms during midterm years (2022). The S&P 500 has fallen 9.3% this year so we’re getting close.

Better days ahead: Historical stock performance is mixed until later in the year — when outcomes are more predictable. Here’s when things could get better:

• The strongest months are typically in the final 3 months of an election year and the following two quarters of the year after.
• Meaning: Oct-Dec 2022 and Jan-Jun 2023 could be strong months.

So in spite of some short-term turbulence, analysts expect the S&P 500 to end on a positive note at 4,982 — 14.5% above Wednesday’s closing price.