Stocks are poised for 'pause and pop' rally as Fed eases policy: CFRA

The Federal Reserve will unleash a"pause and pop" rally in the stock market when policy makers halt their interest rate hikes then shift to cutting down borrowing costs, according to CFRA.

The independent research firm said Monday it believes the Fed's rate hike on February 1 will be the last in its aggressive cycle that started from zero percent last year. Such a move would mark the Federal Open Market Committee's eighth consecutive rate increase and would leave the Fed funds rate at a range of 4.5%-4.75%.

"Historically, the FOMC has started a new rate-easing cycle an average of nine months after the last rate hike. Should history repeat, the FOMC could start cutting rates toward the end of 2023, or early in 2024," Sam Stovall, CFRA's chief investment strategist, said in a note. The nine-month gap between a Fed pause in rate hikes and the first interest rate cut usually results in a gain for the S&P 1500 index, he said. Data that run back to 1995 show 99% of S&P Global sub-industries on the S&P 1500 posted average price increases.

The top-performing sectors have been the financials and real estate groups, rising 22.5% and 20.1%, respectively. Materials and energy also move higher, but at smaller respective paces of 9.3% and 8.3%.

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