At this week’s FOMC meeting, the Fed threw cold water on the possibility of a rate cut in March. But investors anticipate that one is still coming—perhaps as soon as this summer.
That raises an interesting question: how does the stock market typically respond after the Fed first cuts rates?
This week’s chart provides a clue. It shows how the Dow Jones Industrial Average has historically performed in the 6 months leading up to a first rate cut and then the 12-month performance after the first cut. As you can see, the Dow has typically been flat the year before all first cuts, but then it rallies pretty substantially after the cut—about 15%, on average, over the next year.
Now, as with anything, there is some nuance here. The Dow’s returns tend to be lower if the first cut occurs during an economic recession, particularly if a recession occurs shortly after the first rate cut. So that will be something to keep an eye out for.
But the bottom line is that the stock market has tended to rally in the year after the first Fed rate cut, which explains why investors have gotten so antsy lately whenever there are signs that the first cut might be delayed this year.
This is intended for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.
Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.
Past performance does not guarantee future results.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The Dow Jones Transportation Average™ is a 20-stock, price-weighted index that represents the stock performance of large, well-known U.S. companies within the transportation industry.