Fisher Investments Reviews Whether Markets Need Rate Cuts

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By Fisher Investments — 3/18/2024

Many investors appear to agree rate cuts are necessary for this bull market to continue. But do markets truly need rate cuts to keep rising? As we’ll detail in this article, rate moves aren’t necessarily predictive of where stocks will go next.

What Will the Fed Do Next?

While not back to the Fed’s (relatively arbitrary) 2% target, inflation has abated. Investors generally agree this has been enough to keep policy rates from being pushed higher, though there’s uncertainty about the timing of rate cuts.

Market forecasters have long tried to predict Fed policy, but as history proves, even central bankers have a long history of going against their own forecasts. To illustrate, the following chart compares the last decade’s worth of Fed officials’ median December projections for the fed funds rate (colored lines) against the actual historical rate (black line). The Fed’s own forecasts often don’t align with what they end up doing. Thus, we believe it’s best for long-term investors to tune out Fed policy speculation, focusing instead on what central bankers do, not what they say.

*Source: FactSet and, as of 12/28/2023. Data sourced from annual December Federal Open Market Committee (FOMC) median federal funds rates projections. Effective Federal Funds Rate (EFFR) from 12/31/2013 – 12/27/2023.

Thankfully, predicting monetary policy isn’t necessary for investors in our view. Monetary policy is just one of many factors affecting the economy. It has a long and variable lag, giving investors plenty of time to assess the eventual likely impact of central bank decisions after they are announced.

Are Fed Rate Cuts Necessary for Stocks to Keep Rising?

In our view, the idea that rate cuts—or hikes—are reliable predictors of future returns seems somewhat exaggerated. Fed-policy turning points (i.e., when rate hikes or cuts start) don’t appear to materially influence where stocks go next. Since 1950, over any one-year period of the market’s performance history, returns were positive a little over 70% of the time. One way to determine the impact of a rate change is to look at the 12-month period following the first rate hike (green dots) or rate cut (gold dots) of a cycle. As you’ll see, returns following Fed rate hikes have been more consistently positive than periods following rate cuts. A stark contrast from today’s perception.

While rate cuts don’t appear to be the major catalyst for stocks some investors are hoping for, average returns have still been frequently positive after a cutting cycle begins—indicating it’s usually a good period to be invested.

Source: FactSet, as of 3/6/2024. S&P 500 Price Index Return with initial rate cut and rate hike dates of each interest rate cycle, 1/1/1950 - 2/29/2024. 12 month Rolling Returns are calculated on a monthly basis, while forward returns are from the date of the hike/cut.

Are Rates Too High For Stocks?

With the upper bound of the fed funds rate currently set at 5.5%*, some investors argue current monetary policy is too restrictive for stocks to move higher. However, the absolute level of the Fed’s policy rate doesn’t dictate where stocks go next. As the below table shows, whether the Fed policy rate is below or above 5.0% average, US stocks are nicely positive in the 6, 12 and 24 months following.

*Source: FactSet, as of 3/13/2024.

Chart source: FactSet, Global Financial Data and Fisher Investments Research, as of 1/16/2024 with month-end observations. The Fed Policy Rate referenced is the Federal Discount Rate from 1/31/1925 – 1/7/1971 and the federal funds target rate from 1/8/1971 – 12/31/2023. S&P 500 Index forward total returns from 1/31/1925 to 12/31/2023.

This may seem surprising, but higher interest rates don’t automatically prevent the economy from growing. Several of America’s longest economic expansions occurred with rates above today’s levels. Thus, we believe the Fed’s decisions to raise or lower policy rates aren’t as critical for the economy or stocks as many think.

Why Do Investors Think We Need Interest Rate Cuts?

Investors tend to believe interest rate cuts will reduce financing costs, which could increase lending and boost the economy. But remember, central banks only control very short-term interest rates whereas longer-term interest rates tend to be more important to borrowers (think mortgage rates, for example). Since long-term rates are largely controlled by market forces, central bank adjustments to short-term rates don’t necessarily change the lending picture by themselves.

If cuts to short-term rates alone could boost lending and the economy, then rate hikes should have the opposite effect. However, as we’ve seen in recent years, lending and economic growth have remained resilient despite steep rate hikes. There are a variety of reasons why this disconnect has occurred. But in our view, it’s one of the reasons why rate cuts alone may not necessarily provide a material boost to an already-healthy economy.

Want to Dig Deeper?

In this article, we reviewed how Federal Reserve policy affects markets and the economy. To learn why the economy and stocks have done fine even amid rate hikes in recent years, you can watch our recent video, “Fisher Investments Reviews Why Stocks Don’t Need Rate Cuts in 2024.”

For a closer look at why predicting Fed policy moves is incredibly difficult, but also unnecessary for investors, you can read Fisher Investments’ MarketMinder article, “Powell Didn’t Break Any News on 60 Minutes.”

To hear more about why stocks have already showed they don’t need rate cuts, you can also read Fisher Investments’ recent MarketMinder article, “US CPI and the Rate Cut Debate.”

For more market insights from Fisher Investments, read our latest articles.

Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. The results for individual portfolios and for different periods may vary depending on market conditions and the composition of the portfolio. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice. Nothing herein is intended to be a recommendation. The opinions expressed are subject to change without notice.

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