Following the latest FOMC rate decision to raise the US benchmark overnight interest rate by 25 bp to the 500-525 bp range, the Fed opened the door to a pause in the most aggressive tightening cycle in history. The committee dropped wording of it “anticipates” further rate increases would be needed in its policy statement language. Fed Chair Powell said “We’re closer, or maybe even there” regarding the end-point of rate increases and added: “Looking ahead, we will take a data dependent approach in determining whether additional policy firming may be appropriate”.

The question on investors minds would be how does the market perform in the months after Fed policy rate peaks and subsequently when the committee cuts rates?

Conclusion

Looking at the market performance following the last 10 Fed pauses and cuts, the S&P 500 tends to rally in the months after the Fed policy rate peaks and cuts occur.

• Following a Fed pause, the benchmark has yielded gains in 8 of the last 10 times (80%) with an average return of 5.10% the following quarter. The market also performs well half a year and a full year after the pause, with gains in 6 (60%) and 7 (70%) of the last 10 times respectively. The average return is the highest a year following the pause, at 8.86%. Unless we enter into a major recession, Fed pauses tend to generate very healthy returns in 12 months.

• Following a Fed rate cut, the effect is neutral for the market for the first quarter with an even number of gains and losses in the last 10 occurences with an average return of 0.95%. However, the market reacts positively in the longer run with gains in 6 (60%) and 8 (80%) of the last 10 times 6 months and a year respectively following a cut. The average return increases over time, with 4.68% for half a year and 11.39% for a full year since the cut.

To summarize, it appears that investors are likely correct in waiting for an end to the hikes because during such past pauses and cuts, they have been rewarded in the longer run for buying the Fed pivot.