If You Had Invested $1,000 In SPY When Fed Began Pausing Rates In September, Here's How Much You'd Have Now

The stock market has redeemed itself creditably in 2023, reversing from the previous year’s disappointing performance, thanks to optimism that the Federal Reserve will start reversing its rate hikes.

On the Upswing:

The S&P 500 Index, a gauge of the performance of the broader market, has gained about 23% so far this year. The tale of the 30-stock Dow Industrials Average is even more encouraging, with the blue-chip index breaking record after record in each passing session.

Tech stocks, especially the mega-caps, led the market rally this year. Reflecting the buoyancy in the space, the Nasdaq 100 Index, an index comprising the 100 biggest non-financial tech stocks, has soared over 51%.

The SPDR S&P 500 ETF Trust SPY, an exchange-traded fund that tracks the performance of the S&P 500 Index, has added about 25% year-to-date.

Chart Courtesy of Benzinga

See Also: Best Inflation Stocks

What Drove Buoyancy: The S&P 500 came into 2023 with a loss of of 19.44% for 2022, as the spike in consumer price inflation following the COVID-19 stimulatory measures prompted the Fed to begin a string of rate hikes.

The effective fed funds rate, the volume-weighted median of overnight federal funds transactions, went from near zero at the start of 2022 to 4.12% at the end of the year, according to data provided by the St. Louis Federal Reserve.

Chart Courtesy of St. Louis Fed

The Fed funds rate was at 4.25%-4.50% at the end of 2022, thanks to a string of hikes implemented since March 2022.

Higher interest rates typically hurt consumer morale and, in turn, their spending, which accounts for roughly two-thirds of economic activity. As the economic outlook remained uncertain, companies also turned cautious, choosing to scale back on investments, spending, and resorting to job cuts.

Apart from this, the Fed funds rate, currently standing at a 22-year high of 5.25%-5.50%, serves as a reference rate for fixing key interest rates, including bank lending rates and mortgage rates.

With inflation now headed lower after its summer 2022 peak, the central bank began to pause its rate hikes since September 2023. At the December meeting, the central bank suggested that a soft landing is likely, and the dot-plot curve revealed Fed officials factoring in a median 100 basis points of rate reduction in 2024.

The buoyancy seen in the market reflects investors factoring in rate-cut expectations.

Returns from $SPY:

A $1,000 invested in the SPY on Sept. 19, a day before the Fed ended its rate hikes and began pausing, would have fetched 2.23 units of the ETF. The same would be worth $1,065 now, a 6.5% return over three months.

The S&P 500 Index is expected to have another bullish year ahead, with firms such as Capital Economics, BofA, RBC Capital Markets, and Deutsche Bank rooting for the index to end 2024 at least at 5,000.

The SPY ended Friday’s session down 0.16% at $469.33, according to Benzinga Pro data.

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