With the Federal Reserve holding back twice in a row and recent economic data showing a cooling in inflation, the market is increasing its bets that the Fed's interest rate hike journey has come to an end. If the interest rate hike in July this year is indeed the last time the Federal Reserve has tightened its tightening cycle, taking history as a guide, the S&P 500 index may experience double-digit gains in the following year.
Jessica Rabe, an analyst at market research firm DataTrek, wrote in a report on Wednesday that this is because historical interest rate "peaks" are usually followed by strong stock market rallies.
Within a year after the Federal Reserve stops raising short-term interest rates, US stocks often rebound with double-digit gains and exceed the long-term average price return of 9-10%, "Rabe wrote. "The only exception occurred a year after March 15, 2000, when the Internet foam burst."
Looking back at historical interest rate peaks: After the interest rate hike cycle ended in January 1995, the S&P 500 index rose 35.2% in the following year. After interest rates peaked in June 2006, the S&P 500 index rose by 20.7% in the following year.
A recent case is that after the interest rate hike cycle ended in December 2018, the S&P 500 index surged by 27.9% in the following year.
The S&P 500 can still rise by another 17%
Overall, the average increase in the S&P 500 index within one year after interest rates reached their peak was 17.4%.
The S&P 500 index has remained largely unchanged since July 26th, and the market now believes that this (the Fed's rate hike on July 26th) is the "last" of this rate hike cycle. Therefore, history suggests that the S&P 500 index may rise by 17% in the first half of 2024, "Rabe wrote.
US stocks closed higher on Wednesday as the market is optimistic that the Federal Reserve may have completed rate hikes and the economy is still showing resilience. The latest data on initial unemployment claims and consumer confidence shows that the US economy is slowing down, but it may still be enough to avoid a recession. The S&P 500 index rose 18.43 points, or 0.41%, to 4556.62.
After the US October CPI data released last week was better than expected, the market began to rebound as people increasingly believed that the Federal Reserve had ended interest rate hikes. In the past five days, the S&P 500 index has risen by 1.32%. Experts such as Jeremy Siegel expect interest rate cuts to arrive as early as March next year.
What will happen after interest rate cuts
As for what will happen to the stock market after the Federal Reserve cuts interest rates, Rabe wrote that in the coming months, returns will be "mixed".
Looking back at history, the market usually rebounds within a month after interest rate cuts. But by extending the timeline, US stocks may turn down. For example, in the year after interest rate cuts began in 2001 and 2007, the S&P 500 index fell by 9.6% and 17.8%, respectively.
However, there are exceptions, and 2019 is an example. At that time, the S&P 500 index rose 8.9% in the year after the interest rate cut in July.
This difference is largely due to unique factors, such as the 2001 9/11 terrorist attacks that led to the Middle East War or the long-term damage caused by the 2008 financial crisis. Rabe pointed out that in contrast, the monetary and fiscal policy measures to deal with the COVID-19 crisis helped the US stock market recover faster.