The Federal Reserve has quickly tightened credit conditions over the last 15 months in an effort to reduce inflation. Officials have raised the federal funds rate -- a benchmark interest rate that impacts other rates across the economy, like bank loans and credit cards -- by five percentage points since March 2022, marking the most aggressive series of rate hikes since the early 1980s.
The rationale behind those rate hikes is straightforward: Demand for goods and services drops as the cost of borrowing rises, and that ultimately causes inflation to fall. Indeed, inflation has now decelerated for 10 consecutive months. But tampering with interest rates is not an exact science, and some experts believe the Fed has tightened too aggressively. In fact, analysts at JPMorgan Chase believe a recession is probable before the end of the year.
Last week, JPMorgan Chase CEO Jamie Dimon sat down with Bloomberg to discuss the economy. He candidly told the Fed to "take a pause" on rate hikes, but he also said people should be prepared for rates to go a little higher. Either way, Dimon believes the Fed is nearing the end of its rate hike cycle, and that is good news for investors.
History says the stock market could soar
Since 1970, the Federal Reserve has engaged in 11 rate hike cycles, and theS&P 500 (^GSPC +0.43%) index has produced an average return of 14.8% during the 12-month period following those cycles. Of course, past results are never a guarantee of future returns, but history makes it clear that the stock market could soar once the Fed reaches the end of the current cycle.
Why might that happen? Rising rates have a contractionary impact on the economy. Once that contractionary stimulus stops, investors may feel more comfortable putting money into the stock market, and that would drive the S&P 500 higher. There are many ways for readers to capitalize on that information, but one of the most logical options is to buy an S&P 500 index fund.
NYSEMKT: VOO
Key Data Points
Investors should consider an S&P 500 index fund
The Vanguard S&P 500 ETF (VOO +0.39%) tracks 500 of the largest U.S. companies. Its constituents include value stocks and growth stocks from all 11 market sectors, and that diversity makes it an attractive investment option. Buying shares of the Vanguard S&P 500 ETF is like buying a slice of the U.S. economy.
So what? The U.S. is the largest and most innovative economy the world has ever seen, according to Dimon. Indeed, 8 of the 10 largest companies in the world are U.S. companies. They are detailed below, along with their weighted exposure in the Vanguard S&P 500 ETF.
- Apple: 7.2%
- Microsoft: 6.5%
- Alphabet: 3.4%
- Amazon: 2.7%
- Nvidia: 1.9%
- Berkshire Hathaway: 1.7%
- Meta Platforms: 1.5%
- Tesla: 1.3%
As discussed, the S&P 500 could rise about 15% following the end of the current rate hike cycle. That would certainly be a nice bounce for investors, but the real reason the Vanguard S&P 500 ETF is worth buying is that the S&P 500 has been a consistent moneymaker over long periods of time. The benchmark index has weathered several bear markets and recessions during the last three decades, and it still produced a total return of 1,600% (or 9.9% annually) during that time. At that pace, $150 invested weekly in the Vanguard S&P 500 ETF would be worth $123,700 in one decade, $441,700 in two decades, and $1.3 million in three decades.
There is no such thing as a surefire investment where the stock market is concerned, but the Vanguard S&P 500 ETF is the next best thing. That's why investors should consider buying this index fund.
