Crystal Ball Gazing: Returns Post Fed Peak

  • Financial markets have become increasingly convinced that the Federal Funds Rate has reached a peak in this cycle. These views were cemented after the Federal Reserve’s final meeting of 2023. While keeping rates on hold, the Fed watered down their hard line on keeping rates higher for longer, moving their guidance closer to market expectations.
  • Uncertainty is arguably the only certainty in investing. However, there are still many lessons to be learnt from the past. As the old Mark Twain saying goes, “history doesn’t repeat itself, but it often rhymes.” This is also true for considering major turning points in the market cycle.
  • In thinking about future returns, we can look to previous peaks in the Fed funds rate. We can’t simply implement the playbook that worked in the past. However, a healthy appreciation of where we have been can provide useful guideposts for setting expectations for the future.
  • Following three of the previous five Fed tightening cycles (excluding the current cycle), annual price returns on US equities at some point over the next 12 months reached at least 26%, putting each rally into the top 15% of monthly rolling annual returns since 1928. The remaining cycles were impacted by the dot-com crash and the Global Financial Crisis (GFC).
  • Returns across other asset classes, including global equities and bond markets, have also generally been positive in the 12 months following a peak in interest rates.
  • While returns following peaks in interest rates have been generally positive in the past, timing the market is always a challenging task. However, that is unlikely to stop people from trying. Over the long term, investors who broadly diversify across risky assets and geographies and ride out the bumps in the road have been rewarded with significant gains.

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The record wage boost was supported by several Fair Work Commission decisions, which were well known in advance and unlikely to be repeated. We therefore do not expect the Reserve Bank to respond to the strong read.
The impacts of the pandemic have been enormous. They forced new ways of living to emerge and accelerated many trends that had already been growing in the years prior. Few sectors have been unaffected. Commercial property supply-and-demand dynamics have been altered by transformational changes to the way we live, work, shop, and do business. These have lasting implications for risk and return. Read our article for more detail.
The June quarter National Accounts confirmed the economy is slowing, and we expect to see further slowing from here. This means the next move in the rate cycle is likely to be down, in the second half of next year, when it becomes clear the economy needs policy support.


This document has been created by Westpac Financial Services Limited (ABN 20 000 241 127, AFSL 233716). It provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information has been prepared without taking account of your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. Projections given above are predicative in character. Whilst every effort has been taken to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not consider known or unknown risks and uncertainties. The results ultimately achieved may differ materially from these projections. This document may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, Westpac Financial Services Limited does not accept any responsibility for the accuracy or completeness of or endorses any such material. Except where contrary to law, Westpac Financial Services Limited intends by this notice to exclude liability for this material. Information current as at 10 December 2021. © Westpac Financial Services Limited 2021.