In 1970, renowned investor and market forecaster Martin Zweig coined the phrase “Don’t Fight the Fed”. This phrase underscores the idea that when the Federal Reserve aims to stimulate the economy, reduce inflation, or increase employment, it has the necessary tools to achieve these goals. Historical evidence supports this notion. Recently, the Fed has been working to bring down inflation from a peak of over 9% in 2021 to around 3% currently. Although 3% is not the Fed’s target, inflation is decreasing rapidly. This doesn’t mean that general prices will fall (which would be deflation and economically dangerous), but they are likely to stabilize.
What does history tell us about stock markets when the Fed cuts rates? The chart below illustrates nearly 100 years of data showing stock market returns 12 months after the first rate cuts. Generally, rate cuts lead to positive returns as they lower borrowing costs, which is typically simulative.
Positive returns aren’t limited to stocks. Bonds can also perform well after rate cuts, as shown by the bond index returns over the past 30 years.
However, markets are complex, and investment returns can vary significantly within asset classes. Often, small-cap stocks outperform large-cap stocks following rate cuts. This is because small companies usually have more variable and higher interest rate debt, so reducing interest costs boosts their profits more quickly than for large caps. Additionally, depending on inflation and the global economy, the dollar’s value could rise or fall, impacting companies with international operations.
The optimal strategy to capitalize on this is to… Diversify! By maintaining exposure to all asset classes, your portfolio can benefit from returns wherever they occur, while also reducing volatility.
As always, feel free to reach out to your Bluerock Team with any questions.
Bluerock Wealth Management is registered with HighTower Advisors, LLC, an SEC registered investment adviser and/or Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through HighTower Advisors, LLC. Securities are offered through HighTower Securities, LLC.
This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.
All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Bluerock Wealth Management, HighTower Advisors, LLC nor any of its affiliates make any representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Bluerock Wealth Management and HighTower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice. This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of HighTower Advisors, LLC, or any of its affiliates.
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Bluerock Wealth Management is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC (member FINRA and SIPC). Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.
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