Investors are expecting the Federal Reserve to leave interest rates unchanged in its meeting that concludes on Wednesday after a long series of hikes, but history shows that such a shift doesn’t guarantee a stock-market rally, according to Wall Street veteran David Rosenberg.
Rosenberg, former chief North American economist at Merrill Lynch and now president of Toronto-based Rosenberg Research, noted that since 1950, 11 out of 14 rate-hike cycles ended in recessions.
Based on historical data, the average time between the S&P 500 SPX, +0.65% peak and the onset of recession is about 6 1/2 months, while it takes an average of 12 1/2 months for the S&P 500 to go from peak to trough, which usually happens before a recession ends, according to a report by Rosenberg. (See charts below.)
NBER, Haver Analytics, Rosenberg Research
Haver Analytics, Rosenberg Research
Fed futures traders are pricing a 93% chance that the Fed will keep its key interest rate unchanged in its meeting this week, and a over 60% chance that the central bank will raise the interest rate again in its July meeting.
Stocks were on the rise Tuesday following a May consumer price index reading that matched forecasts, cementing expectations for a Wednesday pause by the Fed. The S&P 500 was up 0.6%, while the Dow Jones Industrial Average DJIA, +0.53% gained 127 points, or 0.4%, and the Nasdaq Composite COMP, +0.61% advanced 0.7%.
Some Fed officials have said they might consider skipping a rate hike in June, without ruling out rate increases in the future.
The S&P 500 tumbled more than 25% from peak to trough in 2022 as it fell from a record close on Jan. 3 to its low for the year on Oct. 12. The index last week exited that long-running bear market — the lengthiest since 1948. On Wednesday, the S&P 500 closed at its highest since April 2022.
See: S&P 500 exits longest bear market since 1948. What stock-market history says about what happens next.
Also read: How a hawkish Fed could kill a baby bull-market rally in U.S. stocks