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How Does Potential End of Rate Hikes Affect the Market?

As expected, the Federal Reserve held interest rates steady for the third consecutive meeting. A day after the Fed’s announcement, the Bank of England and the European Central Bank also announced they would hold interest rates steady. It is widely expected that the Fed’s tightening cycle is over as inflation is improving. 

Rising interest rates shown by Coin piles increasing in size

While Federal Reserve Chairman Powell left the door open for further rate hikes, Fed officials have opened the door to rate cuts next year and projected they would lower rates by three-quarter points to around 4.6 percent by the end of 2024. Powell said, “No one is declaring victory. That would be premature.” But he did acknowledge that slower inflation had officials looking ahead to when they might lower rates. “That begins to come into view, and clearly it’s a topic of discussion,” he said.

 

The stock and bond markets rallied on the news. Many analysts have pointed out that stocks tend to do well when the Fed pauses its rate-hike-cycle. The average and median returns that are cited vary somewhat, but one recent example mentioned that the median returns of the S&P 500 for the 3-, 12- and 30-months from the beginning of past interest hike pauses were +7.7 percent, +19.1 percent, and +62 percent, respectively. Past performance is no guarantee of future results, but these median numbers sound encouraging.  

 

However, a closer analysis shows that the S&P 500 returns after each rate-hike-pause are so varied, and the sample size is so small, that it is impossible to draw any reliable conclusions on future performance. Factors other than rates seem to have had a larger impact during those times. According to data from Charles Schwab, the performance for the S&P 500 during the 6-month and 12-month periods following the pause have been between negative 17.8% and positive 20.1%, and between negative 28.6% and positive 32.1%, respectively. That’s a very wide range. Charles Schwab’s data also shows that the median return for the 6-month and 12-month returns were both negative (-6.0% and -2.7%).


CHart showing S&P 500 performance after rate hike cycles

Source: Charles Schwab, U.S. Outlook: One Thing Leads to Another, November 27, 2023.


If you look at the time periods starting with the rate-hike-pause until the first rate cut, the S&P 500 returns range from negative 28% to positive 28%. Again, a very wide range of outcomes.

 

With such varied projections and data points, we feel it is prudent to stick with an approach that doesn’t focus on any specific expectation but seeks to address any potential outcome. Proper diversification in public and private strategies offers the best solution for reducing volatility and addressing uncertainty.  

 

In the private space, we have been mostly sellers of real estate these past three years, but we are starting to see select buying opportunities. We still like the private credit space and continue to invest in wireless infrastructure. On the public side, we expect continued volatility in the equity markets but favor active management over passive in the current environment. With higher rates, we also see more attractive opportunities in the fixed-income space.

 

Don’t hesitate to reach out if you’d like to discuss further.

 

Happy Holidays from the Eiger Team!


The information contained on this site may not reflect current developments; does not constitute investment, tax, or legal advice; and should not be relied upon for such purposes. There is no guarantee that any forecasts made will come to pass. We make no representation about the accuracy of the information or its appropriateness for any given situation. This information is not an offering. Past performance does not guarantee future results.

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