In March of 2022, the Fed began its mission to combat lofty levels of inflation by raising interest rates at an aggressive pace unseen in decades. In fact, between March of 2022 and July of 2023, the Fed raised interest rates 11 times! Many forget that the Fed had interest rates floating around zero at the start of 2022. As of this writing, interest rates are hovering between 5.25% and 5.50%.
Currently, it appears the Fed has gained control on the rampant rise of inflation. In fact, inflation eased in August to a new three-year low, setting the scene for the anticipated decision to start lowering interest rates. Many may wonder, what does that mean for the stock market? Let’s take a look at what the past has to say.
History has shown that the S&P 500 has a variety of market responses after interest rates start to decline. Economic conditions have a relative influence on the market’s response to this news. In the early 2000s, the Fed started cutting rates in response to the bursting of the dot-com bubble and a slowing economy. Although initially the market reaction following this decision was not ideal, it did set up a strong bull market between 2003 and 2007. The S&P 500 gained roughly 103% in that time span.
In 2019 (Pre-COVID Economic Softening), the FED cut rates three times to combat slowing global growth and trade tensions between the U.S. and China. The S&P 500 reacted positively to these rate cuts, continuing to hit new highs in the second half of the year and adding 24.36% in growth right before the start of the COVID pandemic.
So, although the market’s immediate short-term reaction to rate cuts depends on multiple economic variables, history has shown that the long-term positive trajectory of the S&P 500 prevails.
