The US Federal Reserve hiked interest rates a total of 11 times between March 2022 and July 2023. This made borrowing more expensive and the stock market also logged a lousy 2022. Analysts currently predict that the Fed will hold interest rates steady through the next few meetings. The Fed has taken a “pause” for now. A pause is a period where the Fed keeps rates higher and monitors data on the economy, inflation, and unemployment. In the previous five rate-hike cycles since 1990, the Fed paused an average of 10 months between the last hike and the first cut. Even though this rate-hike cycle was the fastest in history, we expect the pause to be more in line with historic averages. A slowing economy, moderating inflation, and stress in the banking system all support a Fed pause.

 

Last October, the markets were expecting six rate cuts in 2024. However, due to persistent inflation and a very strong labor market in the US, the markets are now expecting only one rate cut this year. We think the Fed may deliver its first rate cut this fall.

 

Global economies, not just the US, are exceeding expectations in recent months – as shown by the chart below.

 

So… what happens to your portfolios during a Fed pause?

 

Long pauses by the Fed tend to be accompanied by attractive stock market returns. When you combine that with the fact that almost $6 trillion of investors’ money is still sitting on the sidelines in the form of cash/cash equivalents, we can begin to get more constructive on the markets. There will come a time when portfolio managers and investors will have “FOMO” and be keen to deploy their cash reserves. This will result in an increased demand for stocks. Mr. Economics has taught us that higher demand brings a higher price. The table below illustrates how markets behaved during the past five Fed pauses:

 

Source: LPL Research, Strategas, Bloomberg, 05/02/24

 

I've also included a piece from our CIBC’s Investment Strategy Group entitled “You are what you eat”

 

As always, thank you for giving us the opportunity to manage your wealth. If you have any questions, please do not hesitate to reach out.

 

Have a great weekend!

 

Akshat