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What is this chart showing?
This chart shows the average change in cash yields over the 12 months following the start of rate cutting cycles (left), as well as the average return of the S&P 500 following the start of cutting cycles (right).
Why is it important?
The Federal Reserve kicked off its highly anticipated rate cutting cycle with a 50bp reduction in September 2024, adding two additional 25bp cuts by year-end.
History shows cash yields decline rapidly following the start of cutting cycles, falling by 2% on average just twelve months later.
U.S. stocks have delivered a positive return of 7.2% one year after the initial cut, though depending on whether the economy avoids a recession or not within that year has led to starkly different results (+19.6% vs. –2.7%).
As of today, the economy shows no signs of an imminent recession, and stocks have been behaving similarly to previous non-recessionary cycles. While this has the potential to change, longer-term results show that regardless of where the economy lands this cycle, patient investors should not be deterred from confidently staying the course.
Related: Equity Performance Around U.S. Recessions
Source: (Left) FactSet - average cash yield change during rate cutting cycles since 1974 represented by the 3-month U.S. Treasury Bill. (Right) Bloomberg, NBER, Morningstar. Includes cutting cycles in which the Federal Reserve lowered rates in multiple meetings without hiking. 1- Cycle is considered recessionary if the U.S. economy was either in a recession when the first cut occurred or entered a recession within 12 months of the first cut according to the NBER. Sept. 2024 included in overall average but excluded from recession scenarios. Past performance does not guarantee or predict future performance. Index performance is for illustrative purposes only. You cannot invest directly in the index.