Fed's 280-Day Rate Pause Signals 13.1% S&P 500 Boost, Sectors Shine

Key Takeaway

• Historical data shows long pauses between Fed rate actions, like the current 280-day pause, typically benefit stocks with the S&P 500 seeing an average gain of 13.1% in recent pauses.
• Markets anticipate two quarter percentage point rate cuts in 2024, but strong April jobs report suggests a soft-landing scenario is likely.
• Financials and energy sectors historically outperform during these pauses, generally returning about 15%.

Fed Pause Sparks Equity Optimism

The Federal Reserve's current pause in rate hikes, now at 280 days, marks the second-longest in modern history, only behind the 2006-07 pause. This hiatus is historically favorable for stocks, with the S&P 500 averaging a 6% gain during previous pauses over the last 50 years. This gain increases to an average of 13.1% in the last six pauses since 1989. Jeff Buchbinder, chief equity strategist at LPL Financial, highlights that the gains seen since the Fed's last hike in July 2023 align with this historical trend, suggesting a positive outlook for equities in the current pause.

Equity Performance Amid Economic Strength

Despite concerns over inflation and economic resilience, the market is pricing in two quarter percentage point rate cuts in 2024, starting in September. However, the strength of the April jobs report suggests a soft-landing scenario is more likely, which historically bodes well for stocks. Buchbinder notes that stocks tend to sell off if the Fed cuts rates due to economic weakness, a scenario not currently anticipated. This perspective supports a cautiously optimistic view for equities, especially given the recent performance of the S&P 500.

Sectorial Insights and Tactical Stance

LPL Financial maintains a neutral stance on equities, citing a well-balanced risk-reward trade-off between stocks and bonds. However, historical performance during long Fed pauses indicates financials and energy sectors as outperformers, typically returning 15% for the period. This sector-specific insight provides a nuanced view of the equity market, suggesting areas of potential strength amidst broader market uncertainty.

Street Views

• Jeff Buchbinder, LPL Financial (Bullish on stocks during Federal Reserve rate action pauses):

  "Long pauses are typically good for stocks, and the gains achieved since the Fed’s last hike in July 2023 are consistent with recent history... The pace and rise of the S&P 500 during that time are in line with what we are seeing now."