Last month, the Fed intervened to reduce the rate by double the number of 125 bases. And with a 225 base drop since last fall, what does this mean for the return of stocks? Let’s look at history.
Since 1950, the Fed has cut more than 200 points 11 times in an attempt to replicate a declining economy. Economists believe it takes six months for the price reductions to take effect which should be three years. So I reviewed the three-year return of the S&P 500 Index and the Farm / French Small Cap Value benchmark portfolio for each season.
After cutting 200+ bases, the one-year return for the S&P 500 was 13.5% with two return times. The average three-year return for the S&P 500 was 31.8% with a one-time return.
However, the history of the Farm / French Small Cap Value benchmark did well. The average annual return is 34.5% with no negative returns. The median return for the three years was 100.5% with only one repayment period.
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
It is clear from history that the decline in Fed prices does not guarantee the return on investment. However, they increase the chances of doing this – especially with smaller stocks. (Note: the chance of losing money with the S&P 500 index each year is about 30%.)
Martin Zweig once said:
Don’t fight the Fed!
How wise his counsel was!