The end of Fed rate hikes suggests good things for equities.
The stock market’s surge last week—U.S. and global equities soared nearly 6%—may be the start of an extended run.
The reason: peak rates. In the wake of the October jobs report showing a cooling labor market, it appears increasingly likely that the Fed is done raising short-term interest rates. And historically, stocks tend to be in the black after the Federal Reserve Board wraps up a campaign of rate hikes.
Looking at the last eight conclusions to Fed tightening cycles going back to 1970, the S&P 500’s forward 12-month return was positive in seven of those eight periods.
Even better, the stock market’s returns have historically been robust once rates top out. The chart shows that the S&P 500, on average, has gained 12.3% during the 12 months after the Fed stopped raising rates. That’s 4.7 percentage points higher than the average peak federal funds rate—which influences the interest rates on CDs and other “risk-free” financial instruments—of just 7.6% over that period.
Moreover, the stock market’s 12-month return exceeded the peak federal funds rate 75% of the time after the Fed stopped raising rates.
The upshot: Staying on the sidelines—avoiding equities, loading up on CDs, etc.—after rates have peaked may not work in investors’ favor. And while there will always be uncertainty and concerns over current events and conditions, history suggests that stocks may be positioned to rally in the coming months.
This commentary is written by Horizon Investments’ asset management team.
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