Why does the positive impact of the Federal Reserve's pause in interest rate hikes outweigh the impact of rate cuts on the stock market?
The positive impact of the Federal Reserve's pause in interest rate hikes on the stock market outweighs the impact of rate cuts. Investors have been putting their funds into money market funds in a high interest rate environment, but this situation is expected to change. The Fed will maintain stable interest rates in its next policy actions, signaling the beginning of a "pause period" between rate hikes and cuts. During this period, investors should hold stocks instead of collecting interest in money market funds. Research shows that stocks provide the highest average annual returns during a pause period. At the same time, there are also opportunities in the bond market to take advantage of bond yields. In addition, investors should choose high-quality stocks with low leverage, stable earnings growth, and healthy balance sheets. In the long run, cash misses out on potential opportunities in the stock market.
Zhitong App has learned that investors are expected to pour a record-breaking $14 trillion into money market funds in 2023 in search of approximately 5% cash return in a high-interest rate environment. However, this situation may be coming to an end, according to BlackRock.
The market expects the Federal Reserve to maintain interest rates when announcing its next policy action on Wednesday. It is widely anticipated that the next move by the Fed to adjust rates may be a cut.
This situation signifies that the "pause period" between rate hikes and rate cuts by the Fed has begun. According to Gargi Chaudhuri, Head of Investment Strategy for BlackRock Americas iShares, this pause period is a time for investors to hold stocks rather than collect interest in money market funds.
Chaudhuri stated in a Yahoo Finance live broadcast, "This may be a good time for investors to reduce their holdings of cash or cash-like assets."
It is understood that Chaudhuri analyzed the returns of the S&P 500 index in the six months before the last rate hike, during the pause period, and in the six months after the first rate cut. The analysis shows that stocks provided the highest average annual return during the pause period.
Chaudhuri said, "Whether you are in the bond market or the stock market, it is crucial to invest during this pause period. This is somewhat urgent because we believe that the Fed will start cutting rates in the second half of 2024."
Furthermore, Chaudhuri also sees opportunities in the bond market, taking advantage of the "amazing" bond yields, while also recommending "high-quality" stocks in the stock market, which are characterized by low leverage, stable profit growth, and healthy balance sheets.
Callie Cox, a US investment analyst at eToro, pointed out in a blog post in November that it is reasonable for a large amount of funds to flow into money market accounts in 2023 as interest rates rise and many people become concerned about the economic outlook.
However, Cox emphasized a key warning, "Cash is not meant to be kept under the mattress forever."
Although cash carries lower risk, it has missed out on potential opportunities in the stock market in the long run. Cox's research provided to Yahoo Finance shows that in 5 out of the past 8 economic cycles, stocks significantly outperformed cash (each cycle defined as ending with an officially announced economic recession, which has not occurred since 2020).