A Steady Fed Suggests Further Gains In The Overall Stock Market

Oct. 25, 2021 11:12 PM ETVTI, VTSAX, VTSMX2 Comments
Tom Madell profile picture
Tom Madell


  • Investors typically place a tremendous amount of significance on where we are in a Fed rate cycle - either rising, falling, or remaining steady.
  • I examined how a measure of the total stock market, namely Vanguard's Total Stock Market Index fund, performed during Fed cycles going back 24 years.
  • What I found was surprising: the fund performed best when the Fed was steady and worst when the Fed was in an easing cycle with rising rates in between.
  • Since the Fed is currently on hold, the overall stock market's performance, that is, the performance of these Vanguard funds, should continue to do well based on historical data.

Federal Reserve Keeps Interests Rates Steady

Mario Tama/Getty Images News


Investors tend to place a lot of significance on whether they think interest rates might be headed, or are already in, an up or down cycle. This is obviously because they assume an up cycle will hurt returns while a down cycle is going to help returns. So it should be informative to see how the stock market, or various types of investments within it, actually have done during periods usually of about one year or more, of rising, falling, or steady interest rates, at least those controlled by the Federal Reserve.

According to Investopedia.com

As a general rule of thumb, when the Federal Reserve cuts interest rates, it causes the stock market to go up; when the Federal Reserve raises interest rates, it causes the stock market to go down.

So, naturally, one might guess that the overall stock market has usually done best during extended periods when the Fed was lowering rates. After all, lower rates might seem to be when stocks should excel, while rising rates, such as many are anticipating now, might be expected to be the worst time for many segments of the market. Of course, steady rates might be a good time for many stock investments too.

In my article here last month, I showed that when rates were rising, surprisingly, the overall bond market, as measured by the Vanguard Total Bond Market Investor Index (VBMFX) or the equivalent Admiral or ETF funds (VBTLX or BND), did not tend to show price or NAV drops. Rather, more often than not, these fund prices were found to be rising. And when rates were dropping, bond prices, surprisingly again, were not necessarily doing as well as one might expect. Finally, steady rates, when the Fed was for a year or more neither raising nor lowering rates, did not seem to help in predicting what would happen to bond prices.

Perhaps similar surprises might be observed when tracking how a fund that measures the performance of the total stock market, including large, mid, and small growth and value stocks performed during these sometimes relatively long periods of Fed activity or remaining docile.


As in last month's article, the same 24 1/2 year period was selected for inclusion. The fund performance selected for examination was the Vanguard Total Stock Market Index Fund Investor Shares (VTSMX). This fund has been in existence since April, 1992. (Since the Admiral and ETF versions of this fund, (VTSAX) and (VTI), were not yet available going back over as many full Fed cycles of raising and lowering rates, their performances were not examined. However, those fund classes since their inception perform almost exactly the same as VTSMX).

Results and Analysis

The following tables show the results when fed fund rates had entered a period of rising, easing, and stable fed fund rates. The first column in each table shows the dates for each period. The second column shows the total return for VTSMX over the course of the entire period. Finally, the third column shows the total return during the period on an annualized basis.

Periods Following Fed Rate Increases


Total Return

During Period

(Not Annualized)

Total Return


March 24 1997 - Sept. 28 1998 30.40% 20.28%
June 29 1999 - Jan 2 2001 -2.88 -1.92
June 29 2004 - June 29 2006 19.10 9.60
Dec. 15 2015 - July 30 2019 57.33 15.60

Periods Following Fed Rate Easings


Total Return

During Period

(Not Annualized)

Total Return


Sept. 28 1998- June 29 1999



Jan 2 2001 - June 25 2003



Sept. 17 2007 - Dec 16 2008



July 30 2019 - Mar 15 2020



Periods Following Stable Fed Rates


Total Return

During Period

(Not Annualized)

Total Return


June 25 2003 - June 29 2004



June 29 2006 - Sept 17 2007



Dec. 16 2008 - Dec. 15 2015



Mar. 15 2020 - Oct. 22 2021



All of the time periods shown in the above tables reflected fund performances through the day before the Fed either raised, eased, or started a period of no action that held rates steady.

The tables show the stock market as a whole did best when rates were steady, as contrasted with what you might expect, with an average annualized return of 26.73% during four such periods. Surprisingly, it did the worst when rates were falling with an average annualized return of -3.72, and with an average annualized return of 10.89 when rates were rising!

So how can one explain these results? Steady rates seemed to have occurred in three out of four cases after the economy had come out of crises but did not yet show signs of excessive overheating. In the fourth instance, the Fed finally stopped raising rates after regular increases every month or two between June 2004 and June 2006. In all these cases, the markets highly cheered and advanced strongly.

When the Fed chose to drop rates, in three out of four cases, the economy and stock market had indeed suffered major setbacks causing the Fed to attempt to come to the rescue. But the damage to stock prices had its toll. In the most recent instance, the overall stock market dropped almost 35% in over a little more than a month starting in Feb. 2020 due to the Covid-19 crisis, dragging down returns over the entire seven month period.

What happened when were rates rising? This occurred when the economy was doing quite well, usually associated with higher stock prices but the Fed acted to try to keep the economy from overheating. However, in the case of the June 29, 1999 to Jan, 2 2001 period, the stock market began seriously slumping after the dot.com bubble burst starting in March 2000.

Implications for Investors

Right now, even though the Fed is highly likely to quite soon begin phasing out its bond purchases, called quantitative easing, that is not the same as actually raising rates. Since the Fed Chairman has repeatedly stated the Fed is not expected to raise rates until those purchases have ended sometime later next year, we can assume that rates will remain stable until then, as they have been since the last series of cuts ended on March 15, 2020. Given this data and the fact that the overall market has shown to perform best when rates are stable, it appears likely that stocks can do considerably well until then.

But there are many variables other than interest rates affecting stock returns aside from short-term, Fed fund rates. Therefore, one cannot count on the mere fact of rising, falling, or steady interest rates in deciding what, if any, actions might be needed to maximize returns or minimize possible losses by responding to changes in the Fed funds rate.

Of course, certain types of funds may not have followed the same patterns as is shown by the overall market in response to Fed actions. In my next article, I will look at the returns of several different categories of funds, such as growth vs. value funds, or one or more sector funds to see if the same patterns hold.

This article was written by

Tom Madell profile picture
Tom Madell, Ph.D., is the publisher of Mutual Fund/ETF Research Newsletter, a free newsletter which began publication in 1999 with thousands of readers. It has become one of the most popular mutual fund/ETF newsletters on the internet, as shown here. His site has been named as one of the "Top 12 Investment Newsletters Focusing on Mutual Funds" at mutualfunds.com , an important fund information provider, under "Fund Newsletter". Also, recently his Newsletter was recognized as one of 5 expert mutual fund resources worth following offering free, and, in its case, particularly "unbiased, useful, and original advice" at http://funds-newsletter.com/fundreference-art.htm .He is also a researcher/writer/investor whose articles have appeared on hundreds of websites, including the Wall Street Journal, USA Today, Morningstar and in the international media.His articles have been among the most popular among those posted on the Morningstar.com website by non-Morningstar employed contributors.His recommendations have an outstanding, long-standing record of success . His complete list of former articles can be accessed at http://funds-newsletter.com

Disclosure: I/we have a beneficial long position in the shares of VTSAX either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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