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CONTRIBUTORS

Chris Galipeau

Senior Market Strategist
Franklin Templeton Institute

Lukasz Kalwak, CFA

Market Strategist
Franklin Templeton Institute

Key takeaways:

  • By using history as a guide, we found that equity market behavior after the US Federal Reserve (Fed) starts cutting rates varies depending on economic conditions.
  • The global equity market has rallied when the Fed cut rates during expansions, with limited drawdown risk in the year following the first cut.
  • US Treasuries performed well in all rate-cutting cycles and were an excellent hedge during recessionary cutting cycles.
     

With the US Federal Reserve (Fed) appearing to be on course to begin cutting interest rates in September, In this paper, we want to follow up on a recent analysis we published about asset-market performance after the start of a Fed easing cycle. The earlier study focused on performance of US stocks and bonds, and in this new analysis we expand the study to include non-US equities. The Fed’s interest-rate decisions have global impact, and we believe that many other central banks will also reduce rates.

Analyzing historical global equity performance in the 12 months after the Fed’s first rate cut, we find that equity markets tend to have positive performance when rate cuts are not followed by a recession. In some cases, rate cuts can help the performance of equities—with returns over the ensuing 12 months above historical annual averages. To assess likely outcomes, it’s crucial to consider the timing of the cuts relative to the economic context.

WHAT ARE THE RISKS

All investments involve risks, including possible loss of principal.

Equity securities are subject to price fluctuation and possible loss of principal.

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Large-capitalization companies may fall out of favor with investors based on market and economic conditions.

Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.

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