• Fed Rate Cuts And S&P 500: The 'Why' Matters Most, Data Shows

    来源: Buzz FX / 13 9月 2024 09:25:20   America/Chicago


    The performance of the S&P 500 following the Federal Reserve's rate cuts largely hinges on whether the economy is in a recession or not.





    According to a detailed analysis by Vickie Chang, an analyst at Goldman Sachs, historical data reveals a sharp contrast in how equities react to rate cuts during recessions compared to other economic phases.





    Chang noted that in recessionary periods, stock markets typically experienced meaningful declines after the Fed's initial rate cut. In contrast, during "growth scares" or "normalization" periods, equities have rallied strongly.





    "History tells us that why the Fed is cutting matters—asset performance around the start of the easing cycle has differed depending on what motivated Fed cuts," Chang explained.





    Goldman Sachs analyzed 10 Fed rate-cutting cycles starting from 1984, four of which were associated with recessions (1990, 2001, 2007, and 2020). The remaining six non-recessionary episodes were categorized as either "growth scare" periods (1987, 1998, 2019) or "normalization" periods (1984, 1989, 1995).





    First cut dateType of episode
    September 1984Normalization
    October 1987Growth Scare
    June 1989Normalization
    July 1990Recession
    July 1995Normalization
    September 1998Growth Scare
    January 2001Recession
    September 2007Recession
    July 2019Growth Scare
    March 2020Recession
    Data: Goldman Sachs




    How Equities, Bonds, And Volatility Behave After The First Fed Cut





    The S&P 500's performance diverges sharply between recessionary and non-recessionary episodes.





    The S&P 500, as tracked by the SPDR S&P 500 ETF Trust (NYSE:SPY), gained 11% three months after the first cut during "growth scare" periods – which involve economic slowdowns that don't escalate into full recessions – and it continued to rally, reaching a 15% gain over six months.





    In "normalization" periods, where the Fed cuts rates to bring them back to lower, more sustainable levels after previously hiking them during expansionary times, the S&P 500 also showed positive performance, rising by 5% after three months and 7% after six months.





    During recessions, the stock market tells a very different story.





    The S&P 500 experienced sharp declines of 11% three months after the first rate cut and remained in the red, down 10% after six months.





    This underscores the fact that rate cuts, while intended to stimulate the economy, often come too late to stop the downward momentum in recessions, and stocks struggle as corporate earnings decline and economic activity contracts.





    The VIX, a measure of stock market volatility, also reacts differently depending on the economic backdrop. In growth scare scenarios, volatility tends to decrease significantly after rate cuts. In normalization periods, the VIX initially spikes by 17% three months after the first rate cut, but this increase is short-lived. Volatility stabilizes, dropping to -1% six months after the first cut.





    In stark contrast, during recessions, the VIX tends to rise following rate cuts. Volatility surged by 21% three months after the first cut and remained elevated, still up 9% after six months.





    Regarding the performance of bonds in recessionary periods, the yield on the 2-year Treasury fell on average by 65 basis points (bps) three months after the first cut and continued to decline, dropping by 82 bps six months in.





    Similarly, the 10-year Treasury yield fell by 23 bps three months after the first cut and dropped by 30 bps six months later.





    AssetNormalization (3m)Normalization (6m)Growth Scare (3m)Growth Scare (6m)Recession (3m)Recession (6m)
    S&P 500+5%+7%+11%+15%-11%-10%
    VIX+17%-1%-39%-35%+21%+9%
    UST 2Y Yield-10 bps-65 bps-37 bps-56 bps-65 bps-82 bps
    UST 10Y Yield-19 bps-37 bps-33 bps-51 bps-23 bps-30 bps
    Data: Goldman Sachs




    The ‘Why’ Behind Fed Cuts Drives Market Behavior





    The data clearly shows that asset performance diverges sharply based on the economic context in which the Federal Reserve initiates rate cuts.






    • In recessionary periods, rate cuts often coincide with significant declines in both equities and bond yields, accompanied by a spike in volatility.




    • In growth scare or normalization periods, equities tend to rally, bond yields fall more moderately, and volatility subsides as market participants regain confidence.





    As Chang highlighted, “settling the ‘recession question’ is probably what matters most.”





    Investors should closely watch not only the Fed’s actions but also the reasons behind the rate cuts, as the broader economic context will determine how markets react.





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    Image created using artificial intelligence via Midjourney.


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