Creative Planning’s Charlie Bilello: ‘It’s a myth that rate cuts are bullish’

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Contrary to popular belief, Federal Reserve rate cuts may not be as bullish for the stock market as commonly thought, while rate hikes might not necessarily be bearish, said Charlie Bilello, chief market strategist at Creative Planning.

In a “The Week in Charts” video presentation, the strategist showed that since 1982, S&P 500 (SP500 [https://seekingalpha.com/symbol/SP500]) returns following rate cuts were actually slightly lower than during random time periods, while returns following rate hikes outperformed.

“It’s a myth to say that rate cuts are bullish, rate hikes are bearish,” he said. Both interest rate cuts and hikes are “both bullish from the standpoint that the stock market tends to go up following both of these events.”

His data analysis revealed even more unexpected results when comparing the two scenarios directly.

[S&P 500 forward total returns]
S&P 500 forward total returns (Creative Planning, Charlie Bilello)

“If we’re just being objective here and saying which has been more bullish over the next year, is it rate hikes or rate cuts? Well, it’s actually been rate hikes,” Bilello noted, pointing to a 15% average return following rate hikes compared to 11% following rate cuts over the following year.

He emphasized that investors should focus less on Fed actions and more on long-term investment horizons. Historical data shows that regardless of Fed policy, the probability of positive returns increases with time invested, with average returns of about 6% over six months expanding to approximately 80% over five years.

However, context matters when it comes to rate cuts. The strategist warned that aggressive rate cuts often coincide with economic trouble, citing 2001 and 2007 as periods when the Fed started cutting interest rates before significant market declines.

“You don’t want to see the Fed aggressively cutting interest rates… and you definitely don’t want to see the Fed going back to 0% interest rate policy anytime soon, because that would mean that we’re in another crisis,” he cautioned.

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