IMPORTANT DISCLOSURE INFORMATION
The following presentation by New England Capital Financial Advisors, LLC (“NECFA”) is intended for general information purposes only. No portion of the presentation serves as the receipt of, or as a substitute for, personalized investment advice from NECFA or any other investment professional of your choosing. Please see additional important disclosure at the end of this penetration. A copy of NECFA’s current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.newenglandcapital.com.
As widely expected, the Federal Reserve paused its interest rate hiking campaign at its June meeting. The Fed had signaled that it wanted to review financial data coming in on the impact its rate increases had on inflation and the overall health of the U.S. economy. The Fed had raised rates at ten consecutive policy meetings, boosting short-term rates from near zero to a range of between 5.0%–5.25%.1
Even though jobs data continues to come in hot, inflation has been cooling since June 2022. The morning prior to the Fed’s recent decision, the Bureau of Labor Statistics announced that Consumer Price Inflation (CPI) for May rose by 4%. This is less than half of the 9.1% peak last June and illustrates that inflation appears to be continuing its slow and steady decline.2
The CPI data point undoubtedly went into the Fed’s calculation to hold the line on rates, as did the data on the Producer Price Index for May, which dropped 0.3%. However, it’s important to remember that the Fed’s target CPI inflation rate is 2%, so while they paused in June, the Fed indicated more rate hikes might be needed later this year if inflation doesn’t get closer to its long-term target.3,4
The Stock Market & Fed Pauses
We know that stock markets don’t like it when the economy is expected to slow, which gets reflected in the bond market. For one, higher borrowing costs can cause businesses to postpone decisions, which can slow economic activity and, in the worst case, tip the country into recession. Many economists still anticipate a recession, although they disagree on its potential severity. When interest rates rise, other investments can look more attractive relative to stocks on a risk/reward basis.
In the past, however, when the Fed has paused rates, investors tend to become a bit more "risk on," which can benefit stock prices.
As you can see in the accompanying chart, the S&P 500 trended higher during the past six cycles when the Fed rate increases peaked. In fact, the medium return of the S&P 500 for the 3-, 12- and 30 months were +7.7%, +19.1%, and +62%, respectively. As mentioned, it’s uncertain whether the Fed has finished raising rates for this cycle or if it is merely pausing.5
In conclusion, I want to reassure you that our team is closely monitoring these developments and the potential implications they might have on your investments. It is important to remember that the nature of the financial markets is inherently unpredictable, and fluctuations in interest rates and inflation are a normal part of this economic landscape. Despite this, with each Fed meeting, it's becoming clearer that we are closer to the end of the rate-hike cycle. Thank you for your trust in us.
We look forward to continuing to serve you and your family's financial needs.
- CNBC.com, June 14, 2023
- BLS.org, June 13, 2023
- Reuters.com, June 14, 2023
- Forbes.com, June 14, 2023
- FoxBusiness.com, June 14, 2023