It turns out that a long pause between Federal Reserve rate actions is historically good for stocks, according to LPL Financial. Investors have been anxiously awaiting any indication as to when the Fed will start to lower interest rates, as the central bank continues to hold steady amid reports of sticky inflation and a resilient economy. Markets are currently pricing in two quarter percentage point rate cuts in 2024, starting in September, according to the CME FedWatch Tool . But the current situation could actually be a blessing in disguise for equities. The pause, which has reached 280 days, is the second-longest in modern market history, LPL noted, behind only the 2006-07 pause that reached 446 days. While the S & P 500 has averaged a 6% gain during previous pauses over the past 50 years, that advance actually jumps to 13.1% on average over the last six pauses going back to 1989, suggesting gains have accelerated in more recent history. “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,” said Jeff Buchbinder, chief equity strategist at LPL Financial. “The pace and rise of the S & P 500 during that time are in line with what we are seeing now.” .SPX 1Y mountain S & P 500, 1-year In fact, Buchbinder noted that stocks tend to sell off if the Fed is forced to cut because of economic weakness, which he said is “not in the environment we’re in today.” The strength of the April jobs report, the strategist said, suggests a soft-landing scenario is “more likely than not.” To be sure, however, LPL said it is maintaining a neutral stance tactically on equities, saying the risk-reward trade-off for stocks and bonds remains “well balanced, perhaps with a slight edge to bonds over stocks currently when looking out to year-end.” He expects stock gains could be limited for the remainder of the year. Still, the strategist observed that the sectors that have historically outperformed during long pauses are financials and energy, which generally return 15% for the period.
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