The Federal Reserve recently lowered interest rates by a quarter point, with more cuts possible ahead. For investors, the key question is how rate cuts impact the stock market and broader economy.
Market Impact of Rate Cuts
Historically, the stock market tends to respond positively to lower rates. Cheaper borrowing costs help companies access capital and make it easier for consumers to finance major purchases like homes and cars. Since 1928, the S&P 500 has averaged a 12.3% return in the 12 months following the first Fed rate cut. On average, the month immediately after a cut shows gains of about 1.2%.
Recessionary vs. Non-Recessionary Cuts
The bigger factor is whether the economy is healthy. When cuts occur during recessions, markets have typically posted negative returns one year later. But in non-recessionary environments, stocks have historically delivered strong gains—averaging 20% one year out.
The Outlook for Investors
Today’s market backdrop remains constructive, which supports a cautiously optimistic outlook. While Fed guidance can shift, history shows that rate cuts paired with solid economic conditions often create opportunities for long-term investors.
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