What lessons can we draw from the past about how different asset classes perform during a Fed rate cutting cycle?
Following the 50bp cut in policy rates from the US Federal Reserve on 18 September, much analysis has looked at how different asset classes perform during a Fed cutting cycle. Unfortunately, most of this analysis is simplistic, merely taking the average of returns over the different cycles.
There is, however, significant variation between the different episodes. Given that the Fed was cutting rates in each of them, there has to be another factor which explains the variation. That factor is the economic cycle. In four out of the five episodes a recession ensued. Even in those instances, there were differences in when the recession arrived, from two months following the first cut to 13. The returns when the recession arrived quickly were very different from when the recession arrived later or not at all. We anticipate a soft landing, so investors may wish to consider the returns in the 1984, 1989 and 2019 as providing better guidance on the US outlook.
