Today, the FOMC took a decisive step by cutting interest rates by 50 basis points. While market predictions were leaning in this direction, most major banks had only anticipated a 25 basis point cut, making the actual decision somewhat more aggressive. Initial market reactions were mixed as participants digested the news, but ultimately, we saw a “sell-everything” response across asset classes, with stocks, bonds, gold, and commodities all ending the day in the red.
An Unusually Long Wait for a Rate Cut
This rate cut stands out due to the unusually long 419-day gap since the last rate hike, marking the second-longest stretch in modern history. The only longer interval occurred before the Great Financial Crisis in 2007, which saw a 446-day gap. For context, the average time between the last hike and the first cut since 1974 is 173 days. This extended period underscores the Fed’s heightened uncertainty surrounding the current economic outlook.
What History Tells Us About Recessions After Rate Cuts
Historically, rate cuts can signal a downturn, but it’s not a certainty. Since 1974, there have been nine instances of an initial rate cut, with four of those followed by a recession within 12 months. Three times, no recession occurred, and two cuts were made while the economy was already in a recession. This means, based on past data, the odds slightly favor avoiding a near-term recession. In those four instances where a recession did follow, it took an average of 91 days to unfold—however, current conditions suggest this may not be the case today.
Why a Recession Seems Less Likely Right Now
The National Bureau of Economic Research (NBER) looks at several key economic indicators, including employment, industrial production, and real personal income, to determine whether the U.S. is in a recession. Currently, these indicators show resilience. Employment figures are relatively solid, industrial production remains steady, and income levels, as well as GDP, are trending upwards. In short, while the rate cut may raise recession fears, the underlying data doesn’t support an immediate downturn.
Why Avoiding a Recession is Crucial for Investors
For investors, the distinction between having or avoiding a recession after a rate cut is critical. If a recession doesn’t materialize within 12 months, the S&P 500 has historically averaged a return of 17.8% in the year following the cut. On the other hand, if a recession does occur, that average return drops to -10.6%. This stark difference highlights the importance of understanding the macroeconomic context when positioning your portfolio.
