Bank of America: Don’t Worry, Rate Cuts Still Mean Gains for Stocks
Investors, rejoice! Despite concerns that the market might have "front-run" the Federal Reserve’s recent interest rate cut, Bank of America strategist Savita Subramanian says history suggests further gains are still on the table. The S&P 500, buoyed by the Fed’s first interest rate reduction in four years, has surged to all-time highs this week, pushing some to wonder if the post-cut gains would be capped. However, Subramanian’s analysis of data spanning back to the 1970s shows that the performance of equities leading up to the initial rate cut hasn’t historically impacted their subsequent trajectory.
Key Takeaways
- Historical data indicates no correlation between pre-cut stock performance and subsequent 12-month returns.
- The S&P 500’s proximity to all-time highs prior to the cut hasn’t had a significant impact on its performance after the cut.
- Past data shows an average gain of 11% for the S&P 500 over the year following the first rate cut, with that number jumping to over 20% during non-recessionary periods.
Rate Cuts: A Boon for Investors?
Lower interest rates are typically considered positive news for investors. This is because rate cuts reduce the cost of borrowing money for businesses, potentially boosting profits. An influx of corporate profits can lead to increased stock prices, generating returns for investors.
Subramanian’s Historical Data Analysis
Subramanian’s analysis focused on the relationship between stock market performance before and after the Federal Reserve’s first rate cuts. She found that there’s no clear evidence that stock gains leading up to a rate cut have any impact on their performance in the following 12 months.
This suggests that investors should focus less on where the market is at the time of the cut and more on the potential economic benefits that the rate cut might bring.
The 1995 Analogy: A Bullish Indicator?
One compelling example cited by Subramanian is 1995. The S&P 500 had already surged by nearly 26% leading up to the first rate cut that year, bringing the index within 1% of record highs. Despite this strong pre-cut performance, the S&P 500 continued its rally, gaining a remarkable 23% in the year following the initial rate cut.
This example underscores the potential for sustained gains even when equities have already achieved significant appreciation prior to a rate cut.
Beyond 1995: Average Gains and Non-Recessionary Periods
Beyond individual examples, Subramanian’s historical analysis showcases the overall positive impact of rate cuts on the market. Her study revealed that the S&P 500 has historically climbed by an average of 11% over the year following a first rate cut.
Moreover, when the analysis focuses solely on periods without recessionary conditions, the average gain jumps to over 20%. This demonstrates the even greater potential for market growth during favorable economic climates.
Cautions and Important Considerations
While Subramanian’s analysis highlights the historical positive impact of rate cuts on the stock market, it’s important to acknowledge that past performance isn’t necessarily indicative of future results.
Currently, the market faces a number of uncertainties including:
- Inflation: While the Fed’s rate cut aims to stimulate the economy, it could also worsen inflation, potentially leading to further rate hikes in the future.
- Geopolitical risks: The ongoing war in Ukraine and its impact on global markets pose a challenge to economic stability and potentially future stock performance.
- Corporate earnings: The overall health of the economy and the stability of corporate earnings are crucial to continued stock market gains.
It’s essential for investors to remain vigilant and closely monitor these factors. However, Subramanian’s findings suggest that rate cuts can still be a significant catalyst for market growth, despite concerns about pre-cut market valuations.
