Historical Perspectives on Initial Fed Rate Cuts

Stocks have benefited recently from increasing hopes of a Federal Reserve (Fed) rate cut, pulling the S&P 500 Index back to within 2% of its record high set April 30. But just how much help would a potential rate cut this summer actually provide? We began trying to answer that question here last week by looking back at similar periods in history, and we saw that stocks have historically done well after initial rate cuts in the absence of an immediate recession.

“Wall Street’s favorite analogy for this environment might be the 1995 so-called ‘insurance cuts,’ said LPL Chief Investment Strategist John Lynch. “At that point, the expansion was four years old, growth was solid, and the stock market was doing well. After the Fed’s first cut in July 1995, the expansion lasted almost six years longer.” Interest rates were much higher then, but this comparison seems to hold water.

The rate cut in 1998 offers another promising analogy to today’s Fed environment. The U.S. economy was late in the cycle in a very long expansion then, and we had crises: the collapse of hedge fund Long Term Capital Management and the Asian currency and Russian debt crises. The lack of investor euphoria today, however, poses a stark contrast with the excessive speculation in the late 1990s dot-com bubble period.

We could also make a reasonable comparison to the waves of quantitative easing in the years following the financial crisis and the pause in the Fed’s rate hike campaign in 2016. Stocks responded positively to more stimulus.

The more ominous comparisons are the initial Fed rate cuts in 2001 and 2007. We do not believe these periods are comparable given those cuts immediately preceded recessions, and in our view, leading indicators continue to point to very low odds of a recession in the next 12 months. More on this topic in today’s Weekly Market Commentary.

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

This Research material was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL is not an affiliate of and makes no representation with respect to such entity.

If your advisor is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor. Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit

Member FINRA /SIPC

For Public Use | Tracking # 1-863919 (Exp. 06/20)