SNAPSHOT2 min read

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.

31/01/2024
How do stocks perform after the Fed starts to cut rates?

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.

Stock bonds article figure 1

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.

Stock bonds article figure 2

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.

Important information

The views and opinions contained herein are those of Benchmark Financial Planning. They do not necessarily represent views expressed or reflected in other Benchmark Financial Planning communications, strategies or funds and are subject to change. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable, but Benchmark Financial Planning does not warrant its completeness or accuracy. The data has been sourced by Benchmark Financial Planning and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. Benchmark Financial Planning is not responsible for the accuracy of the information contained within linked sites. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. 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.

Issued by Benchmark Financial Planning Limited. An Appointed Representative of Best Practice IFA Group Limited which is authorised and regulated by the Financial Conduct Authority, the registration number is 223112. Registered office: Broadlands Business Campus, Langhurst Wood Road, Horsham, West Sussex, RH12 4QP. Registered in England and Wales No 07572431.

Topics

Benchmark Financial Planning is an Appointed Representative of Best Practice IFA Group Limited which is authorised and regulated by the Financial Conduct Authority, the registration number is 223112. Registered office: Broadlands Business Campus, Langhurst Wood Road, Horsham, West Sussex, RH12 4QP. Registered in England and Wales No 07572431.

The Financial Ombudsman Service is available to sort out individual complaints that clients and financial services businesses aren't able to resolve themselves. To contact the Financial Ombudsman Service, please visit www.financial-ombudsman.org.uk

The guidance and/or advice contained within this website are subject to the UK regulatory regime and are therefore targeted at consumers based in the UK.