History shows that stock market tends to do well during extended periods of Fed rate pause

  • Long pauses in interest rate cuts by the Federal Reserve have historically correlated with better equity returns
  • Stock market has historically moved higher by an average of 13% during pauses longer than 100 days
  • S&P 500 has gained 6% on average during rate cut pauses over the past 50 years
  • Current pause in interest rate cuts is the second-longest in modern market history
  • Investors remain optimistic despite erosion of rate-cut expectations
  • The only longer rate pause resulted in a gain of 22.1% for the S&P 500
  • 1995-96 pause offers a strong parallel as it took place during an economic soft landing
  • Goldilocks scenario may be returning, indicating more near-term upside for stocks

History may offer relief to stock-market bulls worried about the Federal Reserve’s continued reluctance to begin cutting interest rates. It’s been more than 280 days since the Fed last moved its benchmark policy rate, marking the second-longest pause in modern market history. The silver lining, however, is that data show such long pauses are often accompanied by solid gains for equities. “As the Federal Reserve extends the timeline for interest-rate cuts, historical data shows that longer Fed pauses often correlate with better equity returns,” said Mark Hackett, chief of investment research at Nationwide, in a Wednesday note. NATIONWIDE “In fact, in periods where the pause is greater than 100 days, the stock market has historically moved higher by an average of 13% (see chart above). This should give investors reasons to be optimistic,” he wrote. Policy makers last hiked the fed-funds rate by a quarter of a percentage point, or 25 basis points, to a target range of 5.25% to 5.5% on July 26, where it has stayed since. That marked the apparent end of an aggressive hiking cycle that had started in March 2022, lifting the key rate from near zero. Investors came into 2024 penciling in as many as six rate cuts beginning in March. Sticky inflation readings and other economic data have instead seen the Fed remain on hold — with investors now looking for around two rate cuts, perhaps beginning in September. While stocks stumbled in April, they have largely taken the erosion of rate-cut expectations in stride. The S&P 500 SPX remains up around 8.7% for the year to date and has rallied more than 12% since last July’s rate hike. Jeff Buchbinder, chief equity strategist at LPL Financial, noted that over the past 50 years, the S&P 500 has gained 6% on average during such pauses. Its record is even stronger in the six pauses since 1989, which have tended to be longer and when it has posted an average gain of 13.1%, he said in a note. “The pace and rise of the S&P 500 during that time are in line with what we are seeing now. It’s when the Fed is forced to cut because of economic weakness that stocks tend to sell off — not in the environment we’re in today,” Buchbinder wrote. The only rate pause longer than the current one came in 2006-2007, lasting 446 days and accompanying a gain of 22.1% for the S&P 500. That timing may concern some investors, since it marked the stretch ahead of the kickoff of the 2007-2009 financial crisis and consequent market implosion. But Buchbinder said that since excessive leverage in the banking system juiced those returns, as is now clear in hindsight, it may not offer a good comparison. 2000-2001 offered the one long pause when stocks fell. The S&P 500 declined 7% in a situation accompanied by a recession and accounting scandals that is unlike the current environment, he said. Buchbinder finds a stronger parallel in the 1995-96 pause because it was lengthy and took place during an economic soft landing. The economy and markets later overheated amid the unchecked exuberance that fueled the dot-com bubble, but that comeuppance was four years after the pause had ended. Also, 1995-96 came amid the early phase of the internet buildout, echoing the current ramp-up in artificial-intelligence investments. “We don’t know if Fed Chair Jerome Powell and company will successfully engineer a soft landing, but after the April jobs report, it looks more likely than not,” Buchbinder said. “Goldilocks may have returned, and if so, the 19% gain for stocks during the mid-1990s might be useful as a guide and tell us stocks have some more near-term upside.”

Factuality Level: 3
Factuality Justification: The article provides historical data and expert opinions on the correlation between Federal Reserve interest rate pauses and stock market performance. However, the article lacks depth and context, and it presents the information in a somewhat sensationalized manner, focusing more on potential gains for investors rather than providing a balanced analysis of the situation. Additionally, the article contains some repetitive information and does not address potential counterarguments or risks associated with the current market conditions.
Noise Level: 2
Noise Justification: The article provides a detailed analysis of historical data related to Federal Reserve interest rate cuts and their impact on the stock market. It offers insights into past market trends and compares them to the current economic environment. The information is relevant, supported by data, and stays on topic without diving into unrelated territories. The article also provides actionable insights for investors based on historical patterns.
Financial Relevance: Yes
Financial Markets Impacted: The article discusses the Federal Reserve’s reluctance to cut interest rates and its potential impact on equity returns.
Presence Of Extreme Event: No
Nature Of Extreme Event: No
Impact Rating Of The Extreme Event: No
Rating Justification: The article focuses on the financial topic of the Federal Reserve’s interest rate policy and its potential impact on equity returns. There is no mention of any extreme events.
Public Companies: Nationwide (N/A), Goldman Sachs (N/A), LPL Financial (N/A)
Key People: Mark Hackett (Chief of Investment Research at Nationwide), Jeff Buchbinder (Chief Equity Strategist at LPL Financial), Jerome Powell (Fed Chair)

Reported publicly: www.marketwatch.com