Lower Rates, Better Fates?

September 27, 2024 | Thomas Neuhardt, Research Associate

With the first Federal Reserve rate cut of the current loosening cycle in the rear-view mirror, investors are now questioning how markets will react to a new era of macroeconomic policy. While each rate cycle is unique, examining how the S&P 500 and Bloomberg Aggregate indices have responded to prior instances of rate cuts can give investors some insight on what to expect going forward. To that point, this week’s chart highlights the returns of these benchmarks following the first cut of last six periods of easing by the Federal Reserve. Although rate cuts have historically portended higher near-term equity returns, there have been two instances of negative S&P 500 Index performance in the wake of Fed easing. Specifically, the 1- and 3-year returns following rate cuts in 2001 (the Dot Com Bubble) and 2007 (the Global Financial Crisis) were both negative. That said, performance of the Bloomberg U.S. Aggregate Bond Index was positive during both of those periods, as well as during the other four easing cycles shown in this week’s chart. Even during the 3-year period following July of 2019, which included six months of rate hikes in 2022, the fixed income benchmark returned 0.4% on an annualized basis. In summary, although Fed rate cuts have historically coincided with recessions in the U.S., investors can gain comfort from that fact that both equities and bonds have fared relatively well amid periods of monetary policy loosening.

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