The intricate dance between rate moves and equities
Lower interest rates are broadly perceived as good for stocks: stimulus for the economy and an implication that inflation is under control should be good for corporate earnings. But the relationship is intricate.
This chart expresses the relationship between Federal Reserve hikes and cuts since 1970 and the S&P 500 performance that preceded every move by the central bank – as expressed by the bubble size and colour.
The pre- and post-2000 environments look strikingly different. Not only were rates much higher, but there were fewer outsized market moves. The preponderance of green in the 1980s and 1990s reflects long bull markets, interrupted by the large red bubble of the 1987 crash.
Post-2000, what’s most visible is the gap – seven years that rates spent at zero between 2008 and 2015 – and two large green bubbles. Very sharp gains preceded the Fed’s moves to slash rates to nothing during the GFC and the pandemic, suggesting the market was pricing in the Fed’s hyper-stimulative response to crisis.