Investors have expressed concerns about the Federal Reserve’s decision to maintain its policy interest rate for an extended period. However, historical data suggests that this approach may not necessarily have a negative impact on stocks, according to a recent analysis by Jefferies.
Looking back at thirteen periods in history when the Fed’s key interest rates remained above 5% and stable for at least three months, the S&P 500 index concluded ten out of the thirteen periods with a gain. Additionally, the large-cap U.S. equity gauge experienced an average monthly return of approximately 1.2% during these particular periods.
In fact, the current cycle of stable, elevated interest rates closely resembles the one observed in 1995, both in terms of rate magnitude and pace of rate hikes, as highlighted by the analysts at Jefferies.
Examining the period between 1995 and 1998, there were three instances of stable rates ranging from 5% to 6%. During each of these intervals, the S&P 500 recorded a return of at least 25%, according to the analysts.
Similarly, from 2016 to 2017, another cycle characterized by high and stable interest rates, equities displayed significant rally for the initial ten months, resulting in a 20% return. While gains diminished slightly during the last two months, the cycle ended with a respectable 16% gain.
Since the Fed’s most recent rate hike at the end of June, the S&P 500 has only seen a modest increase of approximately 4%. This suggests that there may still be room for stocks to rise before any future adjustments to the benchmark interest rate by the U.S. central bank.
In terms of sector performance, growth stocks outperformed their value counterparts significantly during the period from 1995 to 1998. A similar trend was observed during the 2016 to 2017 cycle and has continued since June of this year, albeit with a smaller advantage over value stocks.
Despite these historical insights, U.S. stocks experienced a decline on Tuesday afternoon. The Dow Jones Industrial Average was down 420 points, or 1.2%, and is on track to close below its 200-day moving average. The S&P 500 also dropped 1.6%, while the Nasdaq Composite lost 1.8%.
