Chart plotting two lines that represent the average S&P 500 Index performance from 6 months prior to the initial Fed rate cut to 18 months past the initial Fed rate cut. The lines are indexed to 100 as of the initial Fed rate cut at time 0. One line shows an upward trajectory and an average 30% return 18 months past the initial cut for periods in which the Fed rate cut cycle did not correspond with a recession. The other shows a choppy horizontal to down trajectory and an average -2% return 18 months past the initial cut for periods in which the Fed rate cut cycle did correspond with a recession.
Sources: Ned Davis Research, Bloomberg, and Wells Fargo Investment Institute. Recession cases include the cutting cycles that began 5/30/1980, 11/2/1981, 1/3/2001, 9/18/2007, and 7/31/2019. No recession cases include the cutting cycles that began 11/21/1984, 6/6/1989, 7/6/1995, and 9/29/1998. Analysis uses data 18 months prior to through 18 months after the date that the cutting cycle begins. Indexed to 100 at time "0", the initial rate cut, to measure performance. The S&P 500 Index is a market-capitalization-weighted index considered representative of the U.S. stock market. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. Investing in stocks involves risk and their returns and risk levels can vary depending on prevailing market and economic conditions. Fed = Federal Reserve.
Key Takeaways
- Stock market returns after the first Fed rate cut depend heavily on the reason for the cut.
- History shows that if the Fed rate cuts are only an adjustment and not in response to significant macro environment deterioration, stock markets likely will perform well.