A rate-cycle rabbit hole · Oct 2026
There’s a reflex in markets: low rates are rocket fuel for stocks, high rates are a headwind, and when the Fed starts cutting you buy. I split 38 years of S&P 500 returns by what rates were doing — their level and their direction — and the reflex gets two of three backwards.
The mechanism is real, and worth stating plainly. Lower rates cut the discount on future earnings, make bonds less competitive, and ease financial conditions — all tailwinds for equities. “Don’t fight the Fed” earned its place as the market’s most-repeated maxim because the Fed really does move the cost of money, and the cost of money really does move asset prices.
But the maxim bundles three different things — the level of rates, the direction of rates, and the act of cutting — and treats them as one. Pull them apart on 38 years of data and the picture inverts: stocks did best when rates sat high and still, and worst in the one environment the reflex says to buy, while the Fed was cutting.
S&P 500 per year when rates were flat
The market’s favorite environment isn’t low rates — it’s stable ones. Flat-rate stretches since 1988 returned nearly double the long-run average, at the lowest volatility.
The environment the reflex says to buy
While the Fed was cutting, the S&P returned +5.8% a year since 1988 — its lowest and most volatile regime — and −3.4% in the QQQ era. Cuts come when something broke.
S&P 500 per year with rates at 4–6%
High rate levels were the market’s best, not its worst. High rates mean a strong economy, and stocks follow the economy.
“What rates are doing” isn’t one thing. A 5% rate on the way up is a different world from 5% on the way down. So I sliced the S&P two ways, both off the 3-month Treasury yield as a Fed-policy stand-in. By direction: is the rate higher, lower or flat versus six months ago, with a quarter-point buffer each way. By level: is the rate low (under 2%), middling (2–4%), high (4–6%) or very high (above 6%). The window is 1988 to today — the span of the S&P total-return series — which covers the 7–9% rates of the late ’80s, the long zero-rate 2010s, and the 2022–23 round trip.
Rank the three by return and the reflex is already in trouble. Flat-rate regimes returned +17.5% a year; rising rates +8.1%; and cutting — the supposed buy signal — just +5.8%, with the highest volatility of the three (17.6% against about 13%). The market’s best environment is the boring one, rates sitting still. Its worst is the one everyone is taught to buy.
| Direction | Months | 1988–2026 | Volatility | 1999–2026 (QQQ era) |
|---|---|---|---|---|
| Raising | 126 | +8.1% | 13.1% | +5.7% |
| Flat | 205 | +17.5% | 13.1% | +16.5% |
| Cutting | 134 | +5.8% | 17.6% | −3.4% |
S&P 500 annualized total return by rate direction, 1988–2026
Why does cutting look so bad, and why does the number swing so much? Because the Fed cuts for a reason, and the reason is usually that the economy is breaking. The cutting months since 1999 are dot-com (2001), the financial crisis (2008) and the pandemic (2020) — three of the worst equity markets on record. Stretch back to 1988 and you add the gentler easings of 1989–92, 1995 and 1998, and the cutting return climbs from −3.4% to +5.8%. Same signal, very different outcome, depending on whether the cut was a soft-landing adjustment or a crisis response.
The Nasdaq makes the point louder. Across both indices the ranking is identical — flat best, cutting worst — but the Nasdaq’s swings are wider: +18% in flat regimes against the S&P’s +16%, with a deeper hole and far more volatility while the Fed eases.
Annualized total return by rate direction, 1999–2026
Now slice by the level of rates instead of their direction, and the second half of the reflex — “high rates are bad for stocks” — falls apart too. The S&P’s best rate environment since 1988 was 4–6%: +18.1% a year, at the lowest volatility and the highest hit rate (70% of months positive). Even above 6% — the 7–9% world of 1988–91 plus the 2000 peak — stocks compounded at +11.9%, above their long-run average. Low rates (under 2%) returned a middling +7.9%, because near-zero rates show up either in a calm bull or in the depths of a crisis.
| Rate level | Months | Return/yr | Volatility | Positive months |
|---|---|---|---|---|
| Low (<2%) | 197 | +7.9% | 15.7% | 65% |
| Mid (2–4%) | 78 | +8.2% | 13.8% | 63% |
| High (4–6%) | 149 | +18.1% | 13.2% | 70% |
| Very high (>6%) | 41 | +11.9% | 15.0% | 56% |
S&P 500 annualized total return by rate level, 1988–2026
The market doesn’t reward cheap money; it rewards a healthy economy. High-and-stable rates are the sign of one. A cutting Fed is the sign of the opposite — which is why the one environment the reflex says to buy has been the worst to own.
Rates are a symptom of the economy, and stocks follow the economy.So does the stock market like low rates? Not especially. It likes a strong economy, and it likes rates to hold still. Over 38 years the best returns came with rates high (4–6%) and flat; the worst came while the Fed was cutting, because cutting is what the Fed does when the economy is in trouble. The popular version of “don’t fight the Fed” — buy when they cut, fear high rates — gets the contemporaneous record backwards. The caution, as always: this is what returns were during each environment, not a signal. Markets routinely bottom in the middle of a cutting cycle, precisely when the trailing numbers look worst. The Fed tells you the weather, not the forecast.
$SPXTR, from 1988); Nasdaq-100 total return ($NDXTR, from 1999) for the two-index comparison. Monthly closes.%3MTCM). Direction = its change over the trailing 6 months, >+0.25% raising / <−0.25% cutting / else flat. Level = the yield itself, bucketed <2 / 2–4 / 4–6 / >6%.None of this makes the Fed irrelevant — the cost of money is one of the biggest forces in markets, and 2022 showed a hiking shock can do real damage. One rabbit hole deeper, the lesson is just that “low rates good, high rates bad, cuts are a buy” compresses three different things into one slogan. Pulled apart, the market’s actual preference is duller and more sensible: a healthy economy, and a Fed that’s sitting still.