The Federal Reserve cut interest rates by 50 basis points this morning.
There was a lot of debate about whether they should do a step-by-step 25 basis point cut and what they would be signalling to the market if it was such a large cut.
Most are concerned about whether they should make any shifts in their financial decisions regarding accumulation and decumulation.
I don’t think it matters so much if you are an equity investor with a more than 15-20-year time horizon, really.
I took the dates of all the rate cuts since the 1970s and compiled the total returns of US large-cap and small-cap stocks over different time frames since the first cut.
Click to view a larger infographic.
Since I have only monthly return data if the first rate cut starts earlier than 15th of the month, the total returns are calculated from the start of the month of the first cut. If the cut is later than the 15th, then the total returns are calculated at the start of the next month.
I did not include the short recession period due to Covid.
I was also interested in whether there is evidence that small caps actually did worse or better after the Fed cut rates. This is why I also compiled the total returns of small caps with the Fama/French Small Cap Research Index.
Here are a few of my observations:
The returns of the first month is very volatile. Whether recession in the next 12 months, which time period, there are periods where small cap do better than the large-cap, positive than negative. The main point is that we won’t know which we will get when we live through the experience. Returns tend to be okay unless
