Commentary

History suggests the post-pause rally is just beginning

NOVEMBER 2023


Real rates are restrictive by many measures

Real interest rates account for inflation and are often considered restrictive at levels > zero. With the real Fed Funds rate* and yields on inflation protected bonds (TIPS) positive and rising, real rates are indeed restrictive.

Positive Real Rates

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Stocks generally appreciate after the Fed stops tightening rates

Since 1956, the Fed has engaged in 11 interest rate tightening cycles. As measured from the last cycle rate increase, the S&P 500 was up 8:11 times over the next 12 months, with a median return of 18.2%. Over the forward 2-years, the index was up 91% of the time, with a median annualized return of 14.2%.

If monetary policy is restrictive enough for the Fed to stop increasing rates, equity markets could receive a performance tailwind.

Performance Range Post-Cycle End (months)

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*Real Fed Funds (FF) rate = the effective Federal Funds rate minus the trailing six-month average core Personal Consumption Expenditures price index inflation. Past performance is no guarantee of future results. An index is unmanaged and unavailable for direct investment. Source: Bloomberg, Pershing Square “Investor Advisory Committee on Financial Markets,” St. Louis Federal Reserve “FRED” as of 10/31/23.

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