What Do Stocks Do After The First Rate Cut?

It is widely expected that the Federal Reserve Bank (Fed) will cut rates at the upcoming July meeting, with the potential for as many as three total rate cuts this year. This would be the first rate cut since the Fed started hiking rates in December 2015. Concerns over trade and the global economy have sparked much of this worry.

With the S&P 500 Index up nearly 15% for the year, what could this potential first rate cut mean for stocks? After all, the Fed cut rates in January 2001 and September 2007 right ahead of recessions and massive stock market corrections. Could another bear market and recession be headed our way if the Fed cuts rates soon?

“The previous two times the Fed cut rates for the first time in 2001 and 2007, we saw stocks eventually get cut in half,” explained LPL Senior Market Strategist Ryan Detrick. “But the reality is if you go back further in time, you can also see explosive rallies after that first cut.”

As our LPL Chart of the Day, “Not All Rate Cuts Are Created Equal”, shows, since 1984 there have been seven rate cuts that took place after at least one rate hike. The two most recent cuts were followed by poor performance over the next 12 months, but the other five cuts saw solid gains. In fact, the median return for the S&P 500 one year out has been a very impressive 13.9%, which suggests a potential rate cut over the coming months might not be as worrisome as many make it out to be.

For more on our thoughts about the current state of the economy and Fed policy, please read A Record-Long Expansion.

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