How might U.S. stocks react if the Federal Reserve leaves interest rates on hold when its two-day June policy meeting concludes on Wednesday?
The answer could be murkier than investors might expect, according to a series of charts from Bespoke Investment Group.
If Chairman Jerome Powell and the rest of the Fed’s policy-setting committee follow through with a pause, or a “skip,” on Wednesday, it would mark the first time since March 2022 that the central bank’s policy meeting didn’t result in a rate increase.
A historical analysis of market performance on Fed decision days shows that stocks tend to rally harder when the central bank cuts rates. But Fed meetings also have a reputation for throwing investors a curveball. Furthermore, stocks have tended to sell off on “Fed days” in 2023, regardless of what Chair Powell has said in closely followed news conferences that accompanied rate decisions.
Perhaps counterintuitively, the Bespoke team showed that the S&P 500 index
SPX,
tended to rally on Fed days in 2022, a notoriously difficult year for the market that saw the large-cap index fall 19.4%, its worst calendar-year performance since 2008, according to FactSet data. The opposite has been true in 2023, even as the index has risen nearly 14% year-to-date, according to FactSet data.
On five of the last six Fed days, U.S. stocks finished lower. This roughly coincides with the start of the U.S. market’s latest uptrend, which began when the S&P 500 hit its 52-week closing low on Oct. 12.
Over a longer time horizon, U.S. stocks have tended to climb on Fed days regardless of whether borrowing costs were raised, cut or left unchanged. Bespoke chose to start its analysis in 1994, the year that Fed Chair Alan Greenspan decided to start announcing policy decisions on the same day as its meetings.
To be sure, stocks have tended to respond better to rate cuts than rate increases — at least on the day that the decisions were announced. The S&P 500 has recorded an average advance of 21.69 points on days where borrowing costs were raised. By comparison, rate cuts typically coincided with a gain of 36.55 points.
Furthermore, rate-cut announcements typically spurred a sizable knee-jerk reaction higher in U.S. stocks, but with Bespoke’s analysis showing the initial move fades into the 4 p.m. Eastern closing bell.
Another trend that investors should keep in mind is that stock-market investors seem to have a tempestuous relationship with Chair Powell.
The average daily market gain for Fed decision days in the Powell era (Wednesday will mark his 44th Fed meeting at the helm) has been the smallest in recent memory at 0.1% (see below chart). That compares with a near 0.6% average gain during the tenure of Ben Bernanke.
“On the whole of Powell’s tenure, S&P performance on Fed days has been the worst of any chair,” the Bespoke team said in research shared with clients and MarketWatch.
U.S. stocks have been chugging higher this year, with the S&P 500
SPX,
logging its highest closing level since April 19, 2022 on Tuesday. The index gained 30.08 points, or 0.7%, to 4,369.01, according to FactSet data.
The Nasdaq Composite
COMP,
also logged a fresh 14-month closing high, gaining 111.40 points, or 0.8%, to 13,573.32, while the Dow Jones Industrial Average
DJIA,
which has trailed the other major equity indexes in 2023, gained 145.79 points, or 0.4%, to 34,212.12.
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