iFund- Sector performance after a first Fed rate cut

2019-09-18 04:14
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If we take a look at growth/value stocks and large-cap stocks/ small-cap stocks performance and compare to the previous cases, it seems that the probability of recession is low.

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Last month, the US Federal Reserve decided to cut interest rates by 25 bps, in line with market expectations. This is the first rate cut after the great financial crisis. Although Powell called the cut a “midcycle adjustment” and said policymakers were not embarking on a new cycle of rate cutting, the latest figures from CME Group’s FedWatch tool shows that the markets expect Fed will cut interest rates by 50 bps or 75 bps by the year end.

Figure 1: The markets believe the Fed will cut interest rates by 50 bps or 75 bps

Photo: CME Group

Low probability of recession

During the last months, there have been intense debates among investors regarding if the recession is coming. If we take a look at growth/value stocks and large-cap stocks/ small-cap stocks performance and compare to the previous cases, it seems that the probability of recession is low. Growth and large-cap stocks usually outperforms in the non-recession cases after the Fed 1st rate cut. According to past data, as long as the economy does not fall into recession, the average 12-month return of Dow is 24% after the 1st rate cut.

Figure 2: Dow Jones Industrial Average Around First Fed Rate Cut: Recession vs No Recession

Photo: Ned Davis Research

The 3 Sectors most benefited after the 1st Fed rate cut

Since 1972, there has been 9 Fed 1st rate cut cases. 4 of them are non-recession cases. The 3 sectors most benefited after the rate cut in 12 months are health care, consumer staples and communication services. The median returns are 29.8%, 28.0% and 24.6% respectively.

Figure 3: Sector performance 12months after a first Fed rate cut

Photo: Ned Davis Research

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