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Will a rate cut keep the stock market rally alive?

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Insights and Market Perspectives

Will a rate cut keep the stock market rally alive?

Author: Mike Archibald

July 19, 2019

The prospect of interest rate cuts has given equity markets a huge boost so far in 2019, but the rally to date may be the start of something even bigger if the U.S. Federal Reserve (Fed) does as expected and lowers its overnight lending rate later this month. 

While some investors believe that future policy easing is already baked into stock prices, history tells a different story—one that typically involves double-digit returns in the year following the Fed’s first move in a rate-cutting cycle.

Take the track record of the Dow Jones Industrial Average, for example, after the 23 “first cuts” made by the U.S. central bank since 1921.

Recession vs. no recession: Past performance of the Dow Jones Industrial Average following the start of a new rate-cutting cycle
Source: Ned Davis Research

Not surprisingly, the Dow’s performance over these various cycles differed when the economy entered a recession compared to when it did not. When a recession was experienced, the average forward one-year return was 11%, with most of the gains coming at the end of the 12-month horizon. In non-recession cases, meanwhile, the gain was a staggering 24% with particularly strong performance in the early, post-cut months.

The S&P 500 index also performed extremely well in non-recessionary cases, led by non-resource, pro-cyclical sectors such as information technology, communications, healthcare and industrials.

Sector breakdown: S&P 500 performance in a non-recessionary environment following the start of a new rate-cutting cycle
Source: Ned Davis Research

Clearly, based on this analysis, the state of the underlying economy has the potential to play a very big role in the ongoing trajectory of stock prices once (and if) the Fed starts lowering rates.

At the moment, imminent recession seems unlikely given the U.S. economy’s solid employment picture and still positive—albeit slowing—GDP growth. But the ongoing expansion will continue to be threatened by trade tensions between the U.S. and China and other potential headwinds that may arise in time.     

Either way, with the Fed set to cut, investors should not be surprised if stock markets continue to rally in the months ahead. As Mark Twain once said, “History doesn’t repeat itself, but it often rhymes.”

Mike Archibald is an associate portfolio manager at AGF Management Ltd. He is a regular contributor to AGF Perspectives.

The commentaries contained herein are provided as a general source of information based on information available as of July 15, 2019 and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

AGF Management Limited (“AGF”), a Canadian reporting issuer, is an independent firm composed of wholly owned globally diverse asset management firms. AGF’s investment management subsidiaries include AGF Investments Inc. (“AGFI”), AGF Investments America Inc. (“AGFA”), Highstreet Asset Management Inc. (“Highstreet”), AGF Investments LLC (formerly FFCM LLC) (“AGFUS”), AGF International Advisors Company Limited (“AGFIA”), AGF Asset Management (Asia) Limited (“AGF AM Asia”), Doherty & Associates Ltd. (“Doherty”) and Cypress Capital Management Ltd. (“CCM”). AGFI, Highstreet, Doherty and Cypress are registered as portfolio managers across various Canadian securities commissions, in addition to other Canadian registrations. AGFA and AGFUS are U.S. registered investment advisers. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. AGF investment management subsidiaries manage a variety of mandates composed of equity, fixed income and balanced assets.

™The ‘AGF’ logo is a trademark of AGF Management Limited and used under licence.

About AGF Management Limited

Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.

For further information, please visit AGF.com.

© 2021 AGF Management Limited. All rights reserved.

Written by

Mike Archibald

Mike Archibald, CFA®, CMT, CAIA

Vice-President and Portfolio Manager

AGF Investments Inc.

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