When the Fed Pauses... Stocks Will Soar

Inflation is down. The job market is softening.

We're checking all the boxes the Federal Reserve laid out when it began jacking up interest rates. And as I explained yesterday, there's good reason to believe we just saw the last rate hike last week.

The next question for investors is obvious... What does this mean for stocks?

The answer isn't what you might intuitively expect. But it's good news.

Over the past 40 years, stocks have a history of soaring after the Fed pauses rate hikes. And it means we could see the markets soar 20% over the next year.

Let me explain...

You might not like the idea of jumping into the market when the Fed stops hiking rates.

After all, a rate-hike cycle happens for one reason... to cool down the economy. And by the time the Fed quits, the cooldown is in full effect. That means the economy is weaker, and a recession could be on the way.

Buying stocks in that environment may seem like a fool's errand. But remember, the stock market is a forward-looking machine. It prices in whatever we expect to happen over the next six to 12 months.

Because of that, buying when the Fed pauses rates is a smart bet. The table below shows what happened a year after each pause in the rate-hike cycle over the past four decades. Take a look...

We've seen six other rate-hike cycles in the past 40 years. In five of those cases, stocks were dramatically higher a year later. And the average gain was an impressive 19.5%.

The only losing year was after the Fed pause in 2000. And it was before the worst stretch of that bear market. Still, stocks only dropped 11% over the following year.

These numbers might not gel with your expectations. But the forward-looking nature of the stock market really does explain what's going on. Just think about our current situation...

Stocks fell 25% peak-to-trough last year. During that time, unemployment fell... the worst of inflation passed us by... and the seemingly inevitable recession never materialized. Stocks lost a quarter of their value anyway. And that happened because the market had already priced in the likelihood that those bullish trends would reverse.

The stock market's forward-looking mechanism doesn't always do a perfect job. But most of the time, if folks are worried about something in the future, the market has already discounted prices based on that possibility.

That's why when the Fed pauses, stocks tend to soar. Even though the worst of the economic pain isn't over yet, it's already priced in... which puts a floor under expectations. That means stocks tend to move higher, and fast.

Now, there's no guarantee the Fed pause is here yet. But rate hikes are working. That means it's likely, as I explained yesterday. And even if we get one more rate hike, the history of the looming pause is clear.

Stocks could be on the verge of a 20% gain. That means you need to be bullish right now.

Good investing,

Brett Eversole

Further Reading

"Once investors think the world is ending, you don't need things to turn all the way around to 'good' to make a lot of money," Chris Igou writes. All you need is a little good news when expectations are low. We've seen this again and again throughout history... Read more here.

"Stocks rarely fall for two years in a row," Brett explains. "That's because bear markets can't last forever... even if it feels like they will in the moment." Last year was brutal for the markets. But the data shows that a rebound is likely in 2023... Learn more here.