Broker Check

Now What?

November 17, 2023

Recent employment and inflation data suggest that the Federal Reserve is likely done raising interest rates. At least, that is what appears to be getting priced into financial markets. Last month, the odds of a December rate hike were 30%. Today, they are 0.2%, and the odds of a January hike are also 0.2%. In May, the market estimates a 65% chance the Fed will cut rates1.

To be fair, traders who place these bets are often wrong that far out in the future. But if this forecast is anywhere close to accurate, history suggests that relief could be coming to long-term investors who have endured two years of pain.

Starting with the fixed-income market, the table below shows that bonds have delivered positive total returns 100% of the time over the 6-month, 1-year, 3-year, and 5-year periods following each of the last seven Fed tightening cycles. The average return across each period was 9%, 13%, 10%, and 10%, respectively (returns for 1-year and longer are annualized). These returns are staggering compared to the average annual total return of just 2.7% over the last 15 years for bond market2.

Digging deeper, the chart below shows that bonds of varying maturities delivered positive returns in the last five monetary tightening cycles. It wasn’t just a specific area of the bond market that drove positive returns, but rather, it’s been broad-based. Furthermore, longer-dated bonds have outperformed shorter-dated bonds 100% of the time from the Fed’s last rate hike to the first rate cut.

Shifting to the equity market, the table above shows that stocks delivered positive total returns 74% of the time and higher returns than bonds. For example, stocks gained 15% on average in the 12 months after the Fed paused — far outperforming their average annual return of roughly 10%2. Over five years, that comes to an average total return of just under 70%. These numbers are even more impressive because they incorporate some pretty bad recessions like the financial crisis and dot-com bubble.

Add it all up, and markets have performed well when the Fed sat on the sidelines.


Every economic cycle is different, so assuming what lies ahead will be a carbon copy of the past could be a dangerous mistake. That’s why regulators require all investment products and solutions to prominently display “Past performance is no guarantee of future results” on marketing materials with performance data.

But while history may not always repeat itself, it often rhymes because the underlying drivers of cycles rarely change all that much. Of these, arguably the most influential is the Fed’s target interest rate range. Warren Buffett famously said:

“Interest rates are to asset prices what gravity is to the apple. When there are low interest rates, there is a very low gravitational pull on asset prices.”

Before April 2022, financial markets had been in a near zero-g environment since the financial crisis. By keeping interest rates close to zero, the Fed effectively took the risk out of markets. Their actions fueled the greatest bull market in stocks and asset bubbles like non-fungible tokens (NFTs).

The opposite is also true in a high-interest rate environment. Gravity pulls stronger and wreaks havoc on asset prices because risk-taking is riskier. That’s been the case for the last 18 months, but if the Fed is done, this policy shift could provide relief and a catalyst for future gains.

But before the urge to back up the truck takes over, keep two important points in mind. First, by no means does this imply it will be smooth sailing. History has also shown that these periods tend to be volatile. Second, the odds that we return to the glory days of the last bull market are highly unlikely unless the Fed were to cut rates back to zero. Barring another black swan event, this seems highly improbable.

The bottom line is that while past performance may not be predictive, it shouldn’t be ignored either. Gravity doesn’t change much for the earth, nor does it for financial markets.







2 Bloomberg. As of 11/15/2023. Bond Market is represented by the Bloomberg U.S. Aggregate Bond Index. Stock Market is represented by the S&P 500.



This material has been prepared for informational purposes only and should not be construed as a solicitation to effect, or attempt to effect, either transactions in securities or the rendering of personalized investment advice. This material is not intended to provide, and should not be relied on for tax, legal, investment, accounting, or other financial advice. You should consult your own tax, legal, financial, and accounting advisors before engaging in any transaction. Asset allocation and diversification do not guarantee a profit or protect against a loss. All references to potential future developments or outcomes are strictly the views and opinions of Richard W. Paul & Associates and in no way promise, guarantee, or seek to predict with any certainty what may or may not occur in various economies and investment markets. Past performance is not necessarily indicative of future performance.