"73% Growth Without Recession?" A Look at U.S. Stock Market Trends After Rate Cuts

Following the recent significant interest rate cut by the U.S. Federal Reserve, investors are questioning whether to hold their stocks or cash out. 

Following the recent significant interest rate cut by the U.S. Federal Reserve, investors are questioning whether to hold their stocks or cash out. This post will explore historical trends of U.S. stock market performance following major interest rate cuts and the potential outcomes if the economy avoids a recession.

On September 18, 2024, the Federal Reserve implemented a "big cut," reducing interest rates by 0.5 percentage points. This decision has sparked curiosity among investors, who are unsure whether they should maintain their stock holdings or sell off to hedge potential risks. Historically, significant rate cuts have been associated with economic recessions, but Federal Reserve Chairman Jerome Powell has indicated that the U.S. economy is still strong, fueling optimism about a potential "soft landing."

Data shows that the U.S. economy has been expanding for 52 consecutive months, with a GDP growth rate exceeding the potential growth rate by over 1%. This has led to projections that the stock market may follow a similar trajectory as it did in 1995 and 1998, both of which saw significant market gains following rate cuts during periods of economic expansion. The S&P 500 index rose by 45.2% in 1995 and by 36% in 1998 after the Federal Reserve lowered interest rates.

However, a recessionary environment could result in negative outcomes. In contrast to the expansion periods of 1995 and 1998, rate cuts in 2001, 2007, and 2019 were all accompanied by recessions, during which the stock market suffered losses. If the current rate cut proves to be similar to that of 1995, investors might see gains of up to 73% over the next two years, as was the case following previous non-recessionary cuts.

Investment banks such as JP Morgan believe that the current situation resembles the 1995 scenario, and several stocks, including Western Alliance Bancorp, Coca-Cola, Zillow, UPS, and Best Buy, have been identified as potential beneficiaries of this rate cut.

The recent rate cut by the Federal Reserve has created both opportunities and risks for investors. If the U.S. economy can avoid a recession, historical data suggests that stock prices could see substantial gains. However, in a more pessimistic scenario where recession occurs, investors may face significant challenges. Therefore, careful consideration of economic indicators and stock performance will be key in navigating the market during this uncertain period.