- Investors should wait to buy the dip in stocks until after the Federal Reserve's first interest rate hike, according to Bank of America.
- The Fed is expected to kick start a cycle of interest rate hikes at its upcoming meeting in March.
- The S&P 500 struggles just after a first Fed rate hike but tends to do better five, six, and 12 months after, BofA said.
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Investors should hold off on buying the current decline in stocks until after the Federal Reserve's first interest rate hike, according to a Monday note from Bank of America.
The bank's technical analyst Stephen Suttmeier found that stocks have a tendency to sell off in the months immediately after the initial Fed rate hike before eventually moving higher, according to the note. The Fed is expected to raise interest rates to 0.25% from near zero at its upcoming meeting in March.
A dip in stocks after the Fed raises interest rates would line up with prior market history, according to Suttmeier, who found that the S&P 500 generated a negative average and median return for the one,- two-, three-, and four-month periods after the Fed's first interest rate hike.
But those negative returns eventually turn into positive gains five, six, and 12 months after the first rate hike, according to the note.
"If March is the month of the first rate hike, this suggests corrective risk for the S&P 500 from April into July ahead of some stability in late third quarter," Suttmeier said.
His analysis suggests investors should brace for more volatility ahead in stocks, which would line up with another historical analysis of the stock market: returns during mid-term election years. According to Suttmeier, the average decline in the S&P 500 during a mid-term election year is 20%.
"Contentious politics often accompany midterm election years and coincide with increased equity market volatility," he explained.
During January's sell-off, the S&P 500 fell as much as 9.8% on a daily closing price basis, suggesting there could be more room to the downside based on the stock market's historical price action.
If a 20% sell-off does materialize this year, it would send the S&P 500 to just under the 4000 level. The S&P 500 traded around 4500 in Monday trades.