In mid-September, the Fed’s Open Market Committee decided to cut interest rates by 25 basis points, lowering the federal funds rate target range to 1.75 to 2%, in line with market expectations. This is the second rate cut this year. The Fed Chairman Powell stressed that if the Feb will further cut the interest rates and even restart assets purchasing program when necessary. According to the CME Fedwatch Tool, the market expects another 25 basis points rate cut by the end of this year (see Figure 1).
Figure 1: The market expects another rate cut this year.
Of the past eight easing cycles since 1981, four were considered “insurance” rate cuts, i.e. there were some economic hiccup at the time, but they did not fall into recession. The other four times occurred when the economy entered or had fallen into recession. In the year after the start of the insurance interest rate cut, the S&P 500 index rose by an average of 20.4%, while the non-insurance rate cut cycle fell by 10.2%. It is worth noting that after the start of the easing policy, small-cap stocks mostly outperformed large-cap stocks. Small-cap stocks rose by 28% in the year after the start of the 1st first rate cut , while large-cap stocks rose by only 15%.
Figure 2: Performance of large, medium and small-cap stocks after the 1st rate cut
We believe that as more and more central banks cut their interest rates and implement easing monetary policies, the chance of recessions in world’s economy is lower. It is good news for investors. According to Ned Davis Research, more than 70% of global central banks have cut interest rates. According to its statistic, when more than half of the global central banks cut interest rates, the MSCI AC World Index returned 8% a year. It may be a good timing for investments.