On Wednesday, the Federal Reserve raised its federal funds rate by 25 basis points to 4.75% – 5.00%. The Fed also lowered its projections for economic growth to 0.4% this year. All things considered, we believe that the Fed is shifting from a rising rate policy to a “wait-and-see” approach. The swaps market is also only breaking 50% chance of another rate hike in the US with an expectation that they will cut interest rates one full percent by January 2024. In Canada, the forward market is predicting 2 to 3 rate cuts in 2023. If the Federal Reserve is done raising rates, it can have a profound effect on the market. Investing in a rising interest rate environment is like swimming against the current. If rates are done going up we don't have to fight the current anymore.

 

So what happens when the Fed stops raising rates? To answer this question we like to look back in history to help provide some insight moving forward. The chart below shows the performance of the S&P 500 12 months after the Fed stops raising rates during the last five interest rates cycles starting in 1989. The best 12 month performance coming in February 1995 resulting in the S&P 500 gaining 34.70% and the worst being May 2000 when the same index lost 10.55% of its value from the last rate hike. With the average of the 5 hiking cycles resulting in a gain on the S&P 500 19.02%.

 

 

It also should be noted that the Bank of Canada last month stated that they would pause interest rate hikes for the foreseeable future so they can assess how the current hikes will affect the economy. With Canada and now what appears to be the US becoming more dovish when it comes to rate hikes we believe that a fully invested for diversified portfolio will provide the best market returns over the next year.

 

 

I have also included a piece from our CIBC Economics Team entitled "Canada Federal Budget".

 

As always if you have any questions please feel free to give us a call at any time.

 

Have a great weekend.

 

Milan

 

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