Interest rate hike in March, what stocks should we pay attention to?

With the Federal Reserve widely expected to start a rate hike cycle in March, stock market investors should brace for relatively subdued returns in the coming months, Goldman Sachs believes.

The U.S. stock market concluded that the S&P fell an average of 6% in the three months following the first rate hike by the Federal Reserve in the last few interest rate hike cycles. Returns, however, will turn positive to 5% in the six months following the first rate hike.

The start of a Fed rate-hike cycle tends to be strong in the economy, helping to boost stock market performance in cyclical sectors such as materials, industrials and energy, with value stocks also outperforming in the months before and after the first rate hike. Notably, growth stocks with high valuations tend to perform the worst in the six months before and after the first rate hike.

However, high-quality stocks with high margins or strong balance sheets (large gearing ratios) underperformed in the strong economic environment before the rate hike, but rebounded strongly in the months following the first rate hike , resulting in excellent returns.

If market expectations are correct, the Fed will start another tightening cycle in the first half of this year. Based on historical experience, after the Fed raises interest rates for the first time in a cycle, it will have an impact on the economy and financial markets within two to three years.