Rate cuts to energize markets, get investors windfall returns

After years of raising and holding interest rates high, the Federal Reserve is likely to adopt its first rate cut of the cycle tomorrow. And our work suggests that could signal the start of a major stock market rally that lasts through 2025.

Now, it’s important to understand that stocks tend to rise after the Fed cuts rates. Since 1987, the central bank has engaged in seven different rate-cutting cycles, according to Bloomberg. In five of these cases, S&P 500 rose three, six and 12 months after the first rate cut, with average returns of nearly 8% over the following year.

Empirically, rate cuts tend to trigger stock market gains.

But “good” rate cuts usually trigger massive stock market rallies. And that is exactly what we are approaching now.

See; as mentioned in previous issues, rate cuts can be “good” or “bad”.

When the Fed proactively cuts interest rates while the economy is still healthy (positive GDP, low unemployment, etc.), the rate cuts are “good.” These cuts breathe life into a sluggish economy and tend to rejuvenate economic activity over the next few months. Stocks usually go up when we get good rate cuts.

Bad interest rate cuts, on the other hand, occur when the Fed reactively cuts interest rates in response to an already troubled economy (weak GDP, high unemployment, etc.). These cuts are failing to revive a dying economy that continues to weaken. And stocks suffer as a result.

With that in mind, let’s consider the seven rate-cutting cycles we’ve seen since 1987—and why they point to sizable equity gains ahead.