Rate Cuts and Equity Gains: A Historical Perspective

BMO Capital analyzed 10 Fed rate cut cycles since 1982 and found that the S&P 500 delivered positive returns in 8 of them, with an average gain of 10.4%. However, performance varied depending on economic conditions. BMO believes current conditions resemble positive scenarios and that stocks will perform well, although gains may be muted due to the strong rally already in place.

The Federal Reserve's (Fed) monetary policy has been a focal point for investors and economists alike, with recent labor market data and market sentiment suggesting a rate cut may be imminent. According to a BMO Capital analysis of 10 Fed rate cut cycles since 1982, the S&P 500 delivered positive returns in 8 of them, with an average gain of 10.4%. However, the performance varied depending on economic conditions.

The latest data from the Labor Department revealed that initial jobless claims for the first week of September were the highest in nearly four years, rising by 27,000 to 263,000. This, coupled with significant revisions to recent jobs reporting, has fueled confidence that the Fed will cut rates in September. Despite hotter CPI data, markets rallied on expectations of easing, with JPMorgan’s Elyse Ausenbaugh and UBS’s Mark Haefele urging investors to prepare portfolios for a rate-cutting cycle 'Dust off your rate-cutting playbook' JPMorgan tells clients ...^[1].

Economists surveyed by Bloomberg News also anticipate a series of interest-rate cuts in the coming months, with most respondents expecting two cuts by year’s end, and a sizable minority anticipating three reductions. This sentiment is reflected in federal funds futures, which almost fully price in the scenario of three rate cuts this year Economists See Fed Rate Cut Next Week, at Least One More ...^[3].

BMO Capital believes that current conditions resemble positive scenarios for stocks, but gains may be muted due to the strong rally already in place. The bank's analysis suggests that while economic conditions may not be ideal, the Fed's focus on maximum employment and the potential for rate cuts could provide a boost to the stock market.

Investors should be prepared for a potential rate cut and consider the implications for their portfolios. While the exact timing and magnitude of rate cuts remain uncertain, the market's current expectations suggest that investors should be ready for a shift in monetary policy.