Fed rate cuts after long pauses have been good for stocks

Timing is everything. After a nine-month pause, the Federal Reserve decided on Sept 17 that the time was right to resume cutting interest rates.

- Jeff Sommer

The stock market has been eagerly anticipating the Fed's rate action, and for good reason. History suggests that what the Fed has just done will be auspicious for stocks.

All that said, the US central bank's current interest-rate moves generally conform to an encouraging pattern.

Here's the good news: Over the past 50 years, when the Fed has started to cut rates after taking a pause of at least six months, the stock market has nearly always been captivated.

There have been bumpy rides, undoubtedly. The market often lost ground in the first weeks after the Fed resumed rate cuts. But over 12-month periods, for the most part, investors have viewed falling short-term interest rates as a signal to pile into the market and bid up shares to new highs.

There have been seven episodes since 1976 in which, after starting to lower interest rates, the Fed waited at least six months before resuming a rate-cutting cycle. In all but one of these cases, or 85.7 per cent of the time, the S&P 500 rose over the following year, according to Mr Ed Clissold, chief US strategist of Ned Davis Research, an independent financial research firm.

The numbers are impressive. The average 12-month S&P 500 performance, overall, was a gain of 15.5 per cent, compared with 10.1 per cent for all years since the start of 1976. The median, or midpoint, of all gains in the Fed rate-cutting cases was 14.5 per cent.