2022 continues to be a difficult year for investors. Each U.S. stock market rally we have seen this year has ultimately ended in disappointment, and the market has resumed its painful march downward to new lows. This has many investors wondering what it will take for the stock market to stage a sustained rally.

One potential answer to that question is the Fed. Because the stock market’s plummet has coincided with the U.S. Federal Reserve Bank raising interest rates, many investors believe that the market will begin a sustainable rally once the Fed has stopped hiking rates and started cutting rates, which is often referred to as a “Fed pivot.”

As Mark Twain once famously said: “History doesn’t repeat itself, but it does often rhyme.” So in order to test the Fed pivot theory, we can examine prior periods where the Fed has stopped hiking and started cutting.

When we do this, we can see that there have been eight such instances of Fed pivots since 1970, and the results have been very mixed. In three of those instances, the stock market has, in fact, staged a sustained rally after the Fed pivot. But there have also been three instances where the stock market has done quite the opposite.

This begs an important question: What was the difference between these two opposing clusters of results? And an examination of these periods yields one very notable difference: recession. Simply put, when Fed hikes caused the U.S. economy to slow sharply enough that it entered recession, the stock market did very poorly even after the Fed pivot. However, when those hikes did not lead to a recession—an outcome known as a “soft landing”—the stock market performed very well after the Fed pivot.

Two very notable examples of the Fed pivot not helping the market are in the early 1970s when CPI inflation increased all the way to 12% and in the late 2000s prior to the global financial crisis. In both of these cases, the stock market did not rally until the U.S. economy appeared poised to rebound from recession. Essentially, the market required an economic pivot in addition to the Fed pivot.

Meanwhile, Fed pivots in the mid-1980s and mid-1990s were accompanied by strong periods of stock market performance, as the U.S. economy—which had been showing signs of weakness—ultimately remained healthy enough to avoid recession.

In conclusion, while it is not possible to know where the stock market is headed next, history would suggest that the likely cure for the current market woes is not simply a Fed pivot. Ultimately, what may matter most is a pivot to a more constructive economic outlook, in addition to a change in direction from the Fed.

As a result, T. Rowe Price’s Asset Allocation Committee is maintaining a more cautious-than-normal approach to asset allocation positioning. As of October 31, 2022, the AAC holds a tactical underweight to stocks relative to bonds.