Two the Point — Are Rate Cuts Good for Stocks?

In the past, we have discussed the idea that rate cuts (especially the first of a cycle) have historically not led to strong performance in the stock market. This feels counterintuitive, as we have become accustomed to easier monetary policy leading to strong returns. In our view, the period following the financial crisis is somewhat anomalous, as the Federal Reserve (Fed) was able to keep interest rates unusually low because inflation was all but nonexistent.

The long history of the market says that rate cuts are more often followed by below-average stock market performance. That is not to say that rate cuts cause poor performance, but rather rate cuts are most often associated with a deteriorating fundamental backdrop which in turn pressures markets. Since the Fed started publicly announcing changes in rate policy in 1994, there have been 30 cuts to the Federal Funds rate. The median return over the subsequent six and 12-month periods can be found in the chart below. 

Equity investors continue to push stocks higher at the faintest sign of a reversal in monetary policy. We would not say that the bond market is incorrectly pricing in rate cuts later this year – we would say that if those cuts materialize, they are likely to be associated with an environment that proves difficult for stocks. What’s old becomes new again.