| The Art of the Rate Cut The Fed is nothing if not methodical when it comes to trimming rates. There are three primary reasons why the Fed decides to cut rates: - Normalizing. After a period of higher rates, policymakers may determine that inflation is under control. Therefore, it will boost the economy by cutting rates. The intent is to kick the economy into action while minimizing significant risks.
- Recession. If the Fed sees a recession on the horizon (or if the economy is already in a technical recession), a rate cut may stem the tide or prevent an economic downfall.
- Panic. Big events can shake up the market. These panic cuts occur in response to a regional or global event that threatens to tank the market. We saw this when the pandemic hit.
As there are different rationales for rate cuts, there are also different market outcomes. For example, when the Fed made normalizing cuts - in 1984, 1989, 1995, and 2019 - the market experienced positive returns in the following 12 to 36 months. However, after recession cuts - like those in 2001 (dot-com bubble bursting) and 2007 (the Great Recession) - the market turned negative in the following years. You can see all the percentage gains and losses in the table below... The good news for investors is that last year's 100-basis-point cut fits the normalizing mold after years of higher-than-average rates. Regardless of the reason, since 1970, the forward returns of the S&P 500 following rate cuts have been strong... The only times the S&P 500 has been down three years after the Fed's first cut was 1971, 2001, and 2007. The benchmark has never been down five years after a first rate cut. | 
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