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How do stocks, bonds and cash perform when the Fed starts cutting rates?

New long-term analysis digs into returns during 22 rate-cutting cycles since 1928.

30/01/2024
How do stocks perform after the Fed starts to cut rates?

Authors

Duncan Lamont, CFA
Head of Strategic Research, Schroders

In the 12-months after the US Federal Reserve (Fed) starts cutting interest rates, the average return from US stocks has been 11% ahead of inflation. Stocks have also outperformed government bonds by 6% and corporate bonds by 5%, on average.

Cash has been left even further in their wake. Stocks have beaten cash by 9% in the 12 months after rates start to be cut, on average. Bonds have also been a better place to be than cash.

These outcomes are the findings of new, long-term, analysis of investment returns during 22 US interest rate cutting cycles since 1928 – see Figure 1.

Table showing performance of stocks, bonds and cash after first Fed rate cut

Stocks prefer it if a recession can be avoided, but have usually coped ok even if one wasn’t

These returns are even more impressive considering that, in 16 of the 22 cycles, the US economy was either already in a recession when cuts commenced, or entered one within 12 months.

Recession dates are marked in Figure 1 and shaded in Figure 2, below.

Stock returns were better if a recession was avoided but, even if it wasn’t, they were still positive on average.

How do stocks perform after the Fed starts to cut rates?

There are big exceptions, and a recession is obviously not something to be welcomed but – for stock market investors – it has not always been something to unduly fear either.

Bond investors, in contrast, tend to do better if a recession occurs. They usually benefit from safe-haven buying (especially government bonds), which drives yields lower and bond prices higher. But they’ve also done ok if a recession was avoided.

Corporate bonds have outperformed government bonds, on average, in the more economically-rosy scenario.

The range of historical returns is wide for stocks and bonds, but both have tended to do well when the Fed has started cutting rates.

What about today? Unlike most historical episodes, the Fed is not considering cutting rates because it’s worried that the economy is too weak. It is doing so because inflation is going in the right direction, meaning policy does not have to be so restrictive.

If it is right, and can engineer a “soft landing”, then 2024 could be a good year for stock market investors and bond investors.

Authors

Duncan Lamont, CFA
Head of Strategic Research, Schroders

Topics

Market views
Equities
Bonds
Cash
Duncan Lamont
Strategic Research
Interest rates
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Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal.

For illustrative purposes only and does not constitute a recommendation to invest in the above-mentioned security / sector / country.

To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada.

For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.