Hike, hold, or cut? S&P 500 gains most when rates stay put

Rate cuts, by contrast, often coincide with recessions or financial stress. The 2001 cuts came as the dot-com bust deepened; the S&P 500 fell 12% that year. The 2007-2008 cuts accompanied the financial crisis, with the index losing 38%. The 2020 emergency cuts arrived as COVID-19 shut the economy, though the subsequent recovery was rapid.

Hiking cycles have produced mixed results. The 1994-1995 tightening, which preceded the tech boom, saw the S&P 500 gain 5.5%. The 2015-2018 cycle, which ended with a fourth-quarter selloff, returned 7.2% annualized. The 2022 hikes, the most aggressive in decades, pushed the index down 19%.

"The market's best returns come when the Fed is neither fighting inflation nor rescuing the economy," said Sam Stovall, chief investment strategist at CFRA Research. "That neutral zone is where compounding works best."

The current cycle fits the pattern. The Fed has held rates at 5.25%-5.50% since July 2023. The S&P 500 has gained roughly 22% over that stretch. The next policy decision is scheduled for Sept. 18.