GDP report shows why it's a fool's game to bet on the Fed's interest-rate moves

By Mark Hulbert

Buying stocks after the 'final rate hike' in a cycle demands perfect timing

For more than a year now, investors have been playing a largely pointless game of predicting when the U.S. Federal Reserve would start cutting interest rates.

The reason it's pointless is not that the Fed has yet to start cutting, though it is true that investors' game-playing up until now has been in vain. The real reason the game is pointless is that winning doesn't help you beat the market.

Take a look at the chart below, which is based on all U.S. rate cycles since 1980. The orange columns represent the U.S. stock market's average return subsequent to the first rate cut in a Fed rate-cutting cycle. Notice that it is below the stock market's average return across all periods of comparable length (the green columns).

(I chose 1980 as the start date for the chart because it was in late 1979 that the Fed began announcing its target interest rate following meetings of its rate-setting committee.)

Consider what this means: If over the past four-plus decades you had invested a lump sum in the U.S. stock market on each of the exact days the Fed began cutting interest rates, you'd on average have underperformed the market over the subsequent three-, six- and 12 months.

The chart also shows the U.S. market's average return subsequent to the last hike in a rate-hike cycle. While the average subsequent return is modestly higher than the overall market, you still would have needed perfect foresight to know that each of those final hikes was indeed the last one in the cycle.

This past year provides a good illustration of the foresight that would be needed. Many assume that the last day of the recent rate-hike cycle was July 26, 2023, which is indeed when the Fed last raised rates. But it isn't a sure thing that it will be the absolute final hike in this cycle.

First-quarter GDP numbers released this week increased the odds of this possibility. Though the headline GDP increase was lower than the Wall Street consensus expectation, consumer spending - the engine that has kept the economy going - rose at a healthy clip.

Given the economy's strength and stubbornly high inflation, some are now seriously considering the possibility that the Fed's next rate change will be an increase - not a cut.

Related:

Why the U.S. economy may be stronger than the GDP report indicates

Is another inflation scare coming? GDP seems to say yes.

-Mark Hulbert

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04-27-24 0835ET

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