When Waiting on Rate Cuts, Patience Could Be Rewarded

Most of us learn from an early age that patience is a virtue and while that’s one of the most oft-repeated sayings in the English speaking world, perhaps beyond, it has plenty of relevance in the realm of investing. Advisors might want to remind clients of that fact.

Take the case of interest rate cuts by the Federal Reserve. Entering this year, it was widely expected the central bank would pare borrowing costs multiple times. The base case called for three cuts while some banks and economists went so far as to forecast six cuts. Those expectations were big reasons why stocks performed admirably in the first quarter.

However, with roughly four-and-a-half months of 2024 in the books, it appears likely the best case will be a single rate cut. Previously unthinkable, it appears possible that no interest rate reductions will be ushered in this year. Worse yet, if inflation reaccelerates, a rate hike could be in the cards.

Only the Fed knows if that will happen, but working on the premise that the tightening cycle is over and that it will be awhile – perhaps 2025 – before rates are reduced, patience could be a virtue for clients that paying close attention to monetary policy.

The Pause Is Pertinent

Assuming the above scenario is what plays out – no more rate hikes and a lengthy time to the first cut – that’s considered a “pause” and it could work in favor of stocks. In six of the last eight pauses, the S&P 500 rose from the time of the last rate hike up to the first cut. That could be all the fodder advisors need to keep clients from being too consumed about why it’s taking so long for the Fed to cut.

“Despite the lack of good news on inflation, there is a silver lining for patient investors. Historical data shows that longer Fed pauses often correlate with better equity returns. In fact, in periods where the pause is greater than 100 days, the stock market has historically moved higher by an average of 13%. This should give investors reasons to be optimistic,” notes Nationwide’s Mark Hackett.

Advisors can read the tea leaves from Fed Chair Jerome Powell following his latest press brief. Bottom line: it appears as though we’re in for another affirmation of patience being a virtue for clients.

“After the May rate-setting committee meeting, the Fed’s statement highlighted the recent stall in lowering inflation, which the central bankers see as a risk,” adds Hackett. “While Powell offered no hint on the timing of a rate cut, he underscored this point by saying, ‘So far this year, the data have not given us that greater confidence.’”

Point is while a rate hike probably isn’t imminent, the same is almost certainly true of rate cuts. Embrace the pause.

Longer the Pause the Better

In investing, waiting for a desired result can be trying on many market participants, but there is something to be said for exercising patience with equities during the pause. Interestingly, history indicates the longer the pause, the better.

The S&P 500 has often posted double-digit returns when a pause extends beyond 100 days. That’s pretty good because that’s the equivalent of less than five trading months. Guess what? The current pause is one of the longest ever.

“As we navigate through the second-longest pause on interest rate action, now at 280 days, it’s crucial for investors to maintain a long-term perspective” concludes Hackett. “While past performance is not indicative of future returns, there is much to value in a well-diversified portfolio. This approach should give investors a sense of security and control over their financial future. Patience allows investors to harness the power of compounding, weather market volatility, and avoid emotional decisions that can leave them adrift from their financial goals.”

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