Historical trends indicate that the S&P 500 often experiences significant growth, frequently in double digits, in the year following the conclusion of the Federal Reserve's rate-hiking cycle.
Market sentiment currently leans towards the belief that the Fed's period of rate increases has ended. This perspective, if accurate, suggests the potential for the S&P 500 to experience substantial upward movement, potentially in double digits, over the next year.
DataTrek's analysis reveals that the S&P 500 typically witnesses a robust rally following a rate hike peak. Notable instances include post-peak rallies exceeding 20% in the years 1995, 2006, and 2018. DataTrek analysts project an approximate 17% rally for the index through the first half of 2024, based on these historical patterns.
Historically, the cessation of Fed rate hikes has often led to strong stock market gains. Jessica Rabe, a DataTrek analyst, notes that U.S. equities tend to surge by double digits, surpassing the average long-term price return of 9-10%, in the year following the Fed's pause in short-term rate increases. The notable exception to this trend occurred in the year 2000, following the last rate increase on March 15th, amid the dot-com bubble burst.
Examining recent rate hike cycle peaks further illustrates this trend. After the rate hike cycle concluded in January 1995, the S&P 500 surged 35.2% in the subsequent year. A similar pattern was observed in June 2006, with a 20.7% increase in the following year. The most recent instance, following the December 2018 rate hike cycle conclusion, saw the benchmark index spike by 27.9% over the next year.
Aggregating these instances, the average growth in the S&P 500 post-rate hike peak is approximately 17.4%.
Given that the S&P 500 has remained relatively stable since July 26th — the date perceived as the "final" hike in the current cycle — historical data suggests the potential for a 17% rally in the index through the first half of 2024, as per Rabe's analysis.
As of Wednesday morning, the benchmark index stood at 4,547, witnessing a roughly 1% increase over the past five days. This recent market rally, following a favorable CPI report, reinforces the growing belief that the Fed's rate hiking phase has concluded. Experts, including Jeremy Siegal, anticipate potential rate cuts as early as March of the following year.
However, the stock market's response following central bank rate cuts presents a more varied picture. Historical data show that markets typically rally in the month succeeding a rate cut. However, examining the year following rate cut commencements in 2001 and 2007, the S&P 500 experienced declines of 9.6% and 17.8%, respectively. This contrasts with 2019, where the index saw an 8.9% increase in the year following the July rate cut.
These disparities are largely attributable to unique contextual factors, such as the impact of the 9/11 terror attacks in 2001 and the prolonged consequences of the 2008 Financial Crisis. In contrast, the swift monetary and fiscal policy responses to the Pandemic Crisis significantly aided the quicker recovery of U.S. equities, as noted by Rabe.
