The Federal Reserve last week cut its benchmark interest rate for the first time in more than four years, beginning a lon🦹g-awaited process of normalizing monetary policy aft♎er holding rates at a two-decade high for more than a year. 

Market participants, who were abnormally uncertain about the outcome going into the latest Fed meeting, weren’t immediately sure what to make of the decision. Eventually, jitters about the magnitude of the Fed’s 澳洲幸运5官方开奖结果体彩网:half-percentage point cut wore off and stocks 澳洲幸运5官方开奖结果体彩网:surged to record highs on Thursday. 

Wall Street's reaction reflected a peculiar mix of apprehension and optimism in financial markets. On the one hand, rate cuts are broadly 澳洲幸运5官方开奖结果体彩网:supportive of the stock market because they reduce the returns of 澳洲幸运5官方开奖结果体彩网:fixed-income investments and promote business growth. But easing monetary policy is also often a sign that policymakers see trouble ahead for the economy, and that is 澳洲幸运5官方开奖结果体彩网:especially true of large cuts like last week's.

How Do Stocks Usually Perform After Rate Cuts?

Wall Street’s enthusiasm on Th༒ursday was, from a historical perspective, more warranted than its caution on Wednesday.

According to a recent Bank of America (BofA) analysis, of the last 10 Fed policy-easing cycles—going back to 1974—the 澳洲幸运5官方开奖结果体彩网:S&P 500 has returned 11% on average in the 12 months following the first rate cut. That’s slightly below the index’s average return of 12% a year since the start of the 1970s, but a respectable return nonetheless. 

However, half of those 10 rate cuts were followed within 12 months by a 澳洲幸运5官方开奖结果体彩网:recession. When you remove those cuts that coincided with recession, the S&P 500's average 12-month return jumps to almost 21%ꦦ.

Has the Rate-Cut Rally Already Happened?

Some have expressed concern that the stock market’s strong showing so far this year could limit the S&P 500’s near-term upside. After all, Wall Street has been anticipating that the Fed would cut rates al🌼l year, driving the S&P 500 up about 20% since the start of the year.

BofA analysts, howꦆever, found little in the way of a clear relationship between performance heading into and out of a first rate cut, challenging the supposition that the boost stocks get from cuts is front-loaded. For example, in 1995, the S&P 500 was up 26% over the prior 12 months and was within 1% of its then-all-time high when the Fed started to cu🦩t rates. The index went on to return 23% over the next year. 

The lead-up to 1995’s rate cut is arguably more similar to today’s than any other recent easing cycle. Before Wednesday’s rate cut, the S&P 500 was up 27% in the prior 12 months and was also within 1% of its all-time high. Additionally, 1995’s easing cycle was characterized by both a 澳洲幸运5官方开奖结果体彩网:soft landing—an outcome many economists are 澳洲幸运5官方开奖结果体彩网:increasingly confident today’s Fed can achieve—and massive spending on the infrastructure of the internet, paralleling today’s 澳洲幸运5官方开奖结果体彩网:artificial intelligence (AI) spending.