Nothing Typical for Stocks After Fed's Last Hike

Analysis shows an extraordinary range of outcomes since the S&P 500's inception in 1928.

This report originally appeared in the Financial Times on Thursday, May 11, 2023.

Whether the recent rate rise by the U.S. Federal Reserve caps off the most aggressive tightening cycle in four decades is still being debated.

The CME FedWatch Tool—which tracks the probabilities of rate changes implied futures trading data—indicates that investors believe that there is about a 95 percent likelihood of no change to rates at the June monetary policy-setting meeting of the Federal Open Market Committee.

Staying with those odds, for now, perhaps it's time to dust off the "what happens when the Fed is done hiking" playbook. The problem is the playbook has had many different (and diverging) chapters over the history of rate rise cycles. Be mindful of the fact that the sample size is relatively small at 14 main rate-rise cycles since the S&P 500's inception in 1928. That suggests caution around thinking there is a consistent pattern to apply to investment decision-making.

It is indeed possible to construct an average trajectory of the S&P 500 from six months before the final rate rise of each main cycle out to the following year. Focusing only on the average would suggest a pattern of weakness leading into the final rise, some strength in the immediate aftermath, and then a significant sell-off out to about 100 trading days after the final rise. Shame on anyone though who begins and ends the analysis with these generalities.