Investors don’t need to worry that the market got out over its skis on interest rate cuts, according to Bank of America. The S & P 500 rallied to all-time highs this week after the Federal Reserve issued its first interest rate decrease in four years. Rate cuts are typically considered good news for investors because the action lowers the cost of borrowing money, which can in turn juice corporate profits. But some have wondered if post-cut gains would be capped given how much stocks ran up into the announcement. However, Bank of America strategist Savita Subramanian said data going back to the 1970s shows that how equities performed ahead of the initial cut hasn’t historically affected where they go in the aftermath. “Concerns that equities have ‘front-run’ the Fed are ill founded, in our view,” Subramanian said in a note to clients published Friday, two days after the central bank announced its cut of 50 basis points. Said another way, when looking historically, Subramanian found “no relationship” between returns ahead of the Fed’s first cut and 12-month forward performance. On top of that, she said the S & P 500 sitting near a 52-week high heading into the cut has mattered “even less.” She pointed specifically to 1995, when the S & P 500 soared nearly 23% in the year following the first rate cut — even after a 26% rally into the move that propelled the broad index within 1% of record highs. Overall, history provides basis for optimism. The S & P 500 has climbed 11% on average over the year following an initial rate cute. When looking only at scenarios where a recession didn’t take place, the average rally jumps above 20%.
Big returns before Fed rate cut doesn’t mean stocks can’t keep rising, history shows
