Atlantic Edge Insights
September 2024
Market Insights
Stocks Outperform when the Fed Cuts without a Recession
The Federal Reserve Act mandates the Federal Reserve (the Fed) to conduct monetary policy with the goal of ensuring stable prices (low inflation) and maximum employment. In response to multi-decade high inflation in 2022, the Fed increased interest rates at the fastest pace in 50 years. While many expected that this policy would lead to a recession in 2023, the economy continued to grow through that year and into the first half of 2024. Fed Chairman Jerome Powell signaled that the Fed would begin lowering rates, most likely in September, stating “the upside risks to inflation have diminished, and the downside risks to employment have increased.” Despite the softening conditions in the labor market, employment along with many other forward looking economic indicators are still positive.
Rate cuts in a non-recessionary environment have historically led to higher returns in the stock market.
-
Despite recession fears, the economy ended up growing by 2.5% in 2023. Economic growth has continued in 2024 and recession risk remains low as consumer spending and corporate profits remain resilient.
-
Often, the Fed cuts rates in response to a significant rise in the unemployment rate in order to stimulate economic growth. These types of cuts usually coincide with a recession. While cutting rates provides a tailwind for stocks, stock performance immediately preceding a recession is generally lower.
-
Less often, the Fed cuts rates not in response to higher unemployment and impending recession, but instead because the other half of its mandate, stable prices, has been achieved. In cases when rate cuts are not accompanied by recession, stocks averaged a return of 15% the following year. Stock returns are even higher when we remove periods when the Fed only made one cut (1967 and 1968). In those cases, stock prices rose over 20% on average.
-
Following a period like the first half of 2024, with historically narrow returns and increasingly expensive prices for relatively few stocks, market returns have broadened significantly as the likelihood of rate cuts increased. We expect this dynamic to continue.
Atlantic Edge Insights
Matthew Cochran, CFA
Robert Filosa, CFA
Ethan Caldarelli, CFA
Opinions expressed in this commentary may change as conditions warrant and are for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. No graph, chart, formula or other device can, in and of itself, be used to determine which securities to buy or sell, or when to buy or sell such securities, or can assist persons in making those decisions. Consider seeking advice from a professional before implementing any investing strategy.
We are happy to provide a second opinion analysis of your portfolio
