Emotional Rescue: Markets, Fed Policy, and Elections

The March Federal Open Market Committee (FOMC) meeting is this week and although there is no expectation the committee will cut interest rates, there will be the release of the updated “summary of economic projections” (SEP) as well as the "dot plot" showing the collective committee member forecasts for the fed funds rate. As of this writing, the probability—per the fed funds futures market—of a rate cut at the May FOMC meeting has fallen from nearly 30% a month ago, to only 10% today. For the June FOMC meeting, the probability is about a coin flip. As such, for now, the Fed remains in "pause" mode (the period between the final hike in a cycle and the first cut). We debuted the table below in our 2024 outlook report, and it's chock-full of stock-market-related performance throughout historical (and full) Fed cycles.

Full Fed Cycles

Source: Charles Schwab, Bloomberg, Federal Reserve, 1929-3/15/2024.

*Assumes terminal hike for current rate hike cycle occurred on 7/26/2023. Green shading represents best S&P 500 performance and red shading represents worst S&P 500 performance. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance does not guarantee future results.

Warning: Beware of generalities in terms of market behavior when it comes to Fed cycles. There are only 14 historical cycles—a.k.a. a small sample size. In addition, as shown via the red and green boxes, there are wide ranges historically. A small sample size, along with a wide range of outcomes, evokes the old adage, "analysis of an average can lead to average analysis."

Many assume that once the Fed has finished hiking rates in a cycle, it's smooth sailing for stocks. But history shows that in the six-month period following the final hike in a cycle, the S&P 500 was up only 36% of the time, had average and median returns in negative territory; but importantly, showed a range from -18% to +20%. The odds improved a year after the final hike, but only jumped to 43%; and although the average return bumped into positive territory, the range was enormous, from -29% to +32%.

Moving to the middle column in the table above, the range of days during which the Fed was in pause mode was as short as 58 days in the late 1950s and as long as 874 days in the early 1980s. As such, an average of 231 days tells us nothing (especially given that only one historical range even had a 2-handle on it). More remarkable is the following column, showing the S&P 500's performance during the pause period. The average and median showed flattish returns, but that's largely useless information. The percentage positive was exactly 50%, meaning there were seven up moves and seven down moves, with a massive range from -27% to +26%.