Last month, the Fed took the drastic step of cutting rates in half, for a total of 125 basis points. And with a 225 basis point drop since last fall, what does that say about the stock’s return? Let’s look at the historical data.
Since 1950, the Fed has cut more than 200 basis points 11 times in an attempt to simulate a faltering economy. According to economists, it takes six months for the rate cuts to take effect, and they should last three years. Therefore, I analyzed the annual and three-year returns of the S&P 500 Index and the Fama/French Small Cap Value benchmark portfolio for each rate cut period.
After declines of more than 200 basis points, the S&P 500’s one-year average return was 13.5%, with two periods of negative returns. The three-year average returns for the S&P 500 were 31.8% with one period of negative returns.
However, the benchmark Fama/French Small Cap Value portfolio has fared better. The average one-year return is 34.5%, with no negative returns. The three-year average return was 100.5%, with only one period of negative returns.
Periods of rate cuts S&P500 S/V* S&P500 S/V*
of 200bp or more 1y ret 1y ret 3y ret 3y ret
Oct 1957 - Mar 1958 32% 64% 55% 106%
Apr 1960 - Jan 1961 11% 23% 25% 47%
Apr 1970 - Nov 1970 8% 12% 10% -1%
Jul 1974 - Oct 1974 21% 34% 25% 149%
Apr 1980 - May 1980 -19% 46% 46% 175%
Jan 1981 - Feb 1981 -14% 10% 20% 131%
Jun 1981 - Sep 1981 4% 25% 143% 141%
Apr 1982 - Jul 1982 52% 96% 78% 174%
Aug 1984 - Nov 1984 24% 31% 41% 39%
Sep 1990 - Mar 1991 8% 29% 19% 89%
Sep 2000 - May 2001 -15% 19% -11% 57%
Average 13.5% 35.4% 31.8% 100.5%
*S/V = Fama/French Small Cap Value benchmark Portfolio
Data sources: Federal Reserve, Kenneth French data library
Historical data suggests that a Fed rate cut does not guarantee making money in stocks. However, they increase their chances of doing so, especially with small-cap stocks. (Note: The probability of losing money on the S&P 500 in any given year is about 30%)
Martin Zweig once said:
Don’t fight the Fed!
How wise was his advice!