How Stocks Perform After the Final Rate Hike

By TradeSmith Research Team

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Investors continue to quibble over when the Fed will stop raising rates. After the decision not to raise rates on Wednesday, most would agree that they’re either done or nearing the final increase.

But very few agree about what happens next.

Just last week, I shared an article discussing how stocks perform when rates fall. In it, I showed that stocks tend to sputter and wobble during falling rate regimes.

Today’s historical study will take that thought a step further, asking two burning questions:

  1. During Fed tightening cycles, what is the average amount of time it takes to go from the last hike to the first cut?
  2. How do stocks perform in the 3-month to 6-month periods after the final hike?
If you’re considering bailing on stocks as the Fed’s hiking cycle ends, you’ll want to see the results.

When Fed Hikes End

For our first study, we’re going back to 1957. Over the past 65 years, there’ve been 19 periods when the Fed ended rate hikes and began cutting.

The Fed has only waited an average of 4.2 months to go from the last hike to the first cut. History shows that it doesn’t take long for restrictive policy to shift to easing policy:

But you’ll notice that the more recent data shows a different story.

Since the 1990s, we’ve experienced longer stretches between the final hike and first cuts, increasing the average wait time to roughly 10 months.

Two major episodes were the Global Financial Crisis in 1997 at 15 months and the bursting of the Tech Bubble in 2001 at eight months.

The recent mantra of rates staying higher for longer actually would be consistent with recent history.

Now that we’ve solved the first question, let’s now turn our attention to the more important question.

How Stocks Perform After the Final Rate Hike

Turns out, stocks do incredibly well in the period after the final rate hike is tallied.

Looking back to 1980, the S&P 500 boasts strong gains in the 10 final hike events:

  • 3 months later, stocks gain 4.2%
  • 6 months later, stocks lift 8.2%
  • 12 months later, they surge 15.7%

Those returns alone should cause you to celebrate. BUT it gets better…

When you zero in on these events since 1989, animal spirits emerge!

Since 1989, the average gain for the S&P 500 three months later is 8.7%.

Out to six months, you’re looking at a 13.7% lift.

Hold for 12 months and it’s a stunning 20.3% JUICIER:

Either way you slice it, history points to favorable market prices once the final hike is in.

This is why it’s so important to have data on our side when assessing market events. There is an awful lot of media noise about rate hikes, rate cuts, and what to expect from the market next.

Data cuts through the media noise and offers a solid playbook.

Now you’re equipped!

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The recent pullback in stocks is a fertile breeding ground for that exact strategy, and he’s been sharing the moves to make with his paid-up subscribers (friendly reminder that members must be logged in to access the insight).