One factor may influence stock, bond, and dollar performance more than others when the Federal Reserve begins its rate-cutting cycle: the state of the US economy.
On Wednesday, the Fed is anticipated to begin a sequence of rate reductions following a hike in borrowing prices to the highest point in almost twenty years. According to LSEG statistics, markets are factoring in about 250 basis points of easing by the end of 2025.Whether the Fed will lower rates in time to prevent a probable economic slowdown may be one of the main concerns for investors.
If the economy was in a recession, the S&P 500 (.SPX), opens new tab has fallen by an average of 4% in the six months after the first rate-cutting cycle, according to data from Evercore ISI dating back to 1970. In contrast, the S&P 500 saw a 14% increase during the Fed’s cutback during a time when there was no recession. In 2024, the index rises by 18%.Keith Lerner, co-chief investment officer at Truist Advisory Services, stated, “If the economy is heading into recession, the rate cuts are not enough of a support to counter the move down in corporate profits and the high degree of uncertainty and lack of confidence.”
During recessions, Treasuries have done better because investors have turned to US government bonds for safety. In contrast, the dollar tends to appreciate less during a recession, albeit its performance may be influenced by how the US economy performs in relation to other economies.STOCKS
The National Bureau of Economic Research usually labels recessions in retrospect, and as of right now, analysts find no indication that the United States is going through one.
If those circumstances hold, they are encouraging for the U.S. stock market’s surge.
James Reilly, senior market analyst at Capital Economics, stated in a research that “our estimate for aggressive rate decreases and no recession would be consistent with good returns from U.S. equities based on previous easing cycles.”
Nevertheless, in recent weeks, concerns about the economy have rattled asset values.
Weakness in the U.S. job market has helped fuel strong swings in the S&P 500, while global growth fears are reflected in plunging commodity prices, with Brent crude oil trading near its lowest level since late 2021.
Futures markets have fluctuated recently between pricing in a 25- or 50-basis-point decrease on Wednesday, suggesting a lack of clarity over whether growth is simply reverting to its long-term pattern or exhibiting indications of a more significant slowdown.
For investors who want to assess the long-term performance of stocks, the state of the economy is also crucial. One year following an initial decrease made during a recession, the S&P 500 was down an average of over 12%, according to a study by Ryan Detrick, chief market strategist at Carson Group.
In contrast, following cuts during a non-recessionary period, when the reductions were made to “normalize” policy, there was an average increase of 13%, according to the
