The Federal Reserve has initiated a new interest rate cut cycle with a significant 50 basis point (bps) cut. This is only the third time in recent history that the Fed has started a rate cut cycle with such an aggressive move. The last two instances in 2001 and 2007 were followed by major economic downturns, raising concerns about whether history might repeat itself. But could 2024 be different?
🔹 Historical Precedent:
In 2001, the Fed's 50 bps rate cut was followed by a -31% return in the S&P 500 over two years, while the Nasdaq experienced a catastrophic decline of -76%.
In 2007, another 50 bps cut led to a -26% return in the S&P 500 over two years, with the Nasdaq dropping -56% during a historic bear market.
🔹 2024: Different Economic Landscape:
Unlike the previous two instances, the Nasdaq is at all-time highs, and the S&P 500 has also shown strength. The Fed continues to maintain that the economy is strong, aiming for a “soft landing,” despite the aggressive policy move.
🔹 Contradictions and Concerns:
The decision to begin with a 50 bps cut is puzzling given the Fed’s optimistic economic outlook. Historically, such aggressive rate cuts signal economic crises, yet the Fed insists the economy is not in danger.
Interest rate futures are pricing in eight Fed rate cuts over the next 12 months, a level not seen since the 2008 financial crisis. This suggests market participants expect an economic slowdown or recession.
🔹 What History Tells Us:
Historically, starting with a 25 bps cut tends to result in positive returns: +10% in three months and +15% in 12 months.
However, when the cycle begins with a 50 bps cut, the S&P 500 averages a -15% return over the next year—an ominous sign.
Only time will tell whether the Fed can break historical trends and engineer a soft landing. If successful, it would be the first time in history that a 50 bps rate cut didn’t lead to a recession—a monumental challenge.
