As a native of the Massachusetts North Shore, I took sailing lessons at an early age. Since the wind direction and strength are constantly changing, a good sailor adapts by adjusting the sail’s angle relative to the wind to maintain forward momentum. As the Federal Reserve prepares to cut rates, think of your portfolio as a sailboat, writes John Persinos, editor of Investing Daily.
To catch the wind just right, you need to tack, i.e. adjust your sails to maximize speed and stay on course. Whether the Fed delivers a gentle 25 basis point breeze or a stronger 50 basis point gust, your success hinges on your ability to shift your investments in the right direction.
Okay, I won’t belabor my sailing metaphor. Instead, I’ll show you how to position your portfolio ahead of the Fed decision. Historically, the stock market’s response to rate cuts has followed distinct patterns across different time horizons. Let’s look at some examples in the post-WWII era...
2001 Rate Cuts (Dot-Com Bust)
The Fed aggressively cut rates following the bursting of the Dot-Com bubble and subsequent economic slowdown.
Over the near term (3 months), the S&P 500 fell, as the market anticipated worsening economic conditions. Over the medium-term (6-12 months), the market began to recover as corporate earnings stabilized and investors regained confidence. Over the long-term (2+ years), the S&P 500 saw sustained gains once the economic recovery took hold, particularly driven by rebounding technology stocks.
2008 Rate Cuts (Great Financial Crisis)
During the Global Financial Crisis, the Fed slashed rates aggressively to counteract a deepening recession.
Near-term: The S&P 500 continued to decline initially due to the magnitude of the crisis, falling by more than 20% in the first three months after rate cuts. Medium-term: Markets remained volatile but started stabilizing around a year later as stimulus measures took effect. Long-term: From 2009 onward, the market entered a bull run that lasted over a decade, with sectors like technology and consumer discretionary leading.
2019 Rate Cuts (Pre-COVID Slowdown)
Amid trade tensions and a slowing global economy, the Fed preemptively cut rates three times in 2019.
Near-term: The S&P 500 responded positively within weeks, rising by about 8% in the following three months. Medium-term: Over the next 12 months, the market rose more than 25%, buoyed by lower rates and a strong labor market. Long-term: The rally was disrupted by the pandemic in early 2020, but markets surged again with fiscal and monetary interventions.
The implication for investors? Markets may react negatively in the short term as rate cuts often signal economic weakness. However, once the policy takes hold, markets tend to stabilize.
Growth sectors, particularly technology, tend to perform well following rate cuts, given their reliance on low-cost capital. Rate cuts often prompt a rotation from defensive stocks (like utilities and health care) to more cyclical sectors (industrials and consumer discretionary) as economic prospects improve.
In the long run, a dovish Fed typically supports a risk-on environment, benefiting equities broadly, especially growth-oriented sectors.
You should remain vigilant for potential near-term volatility but recognize that rate cuts historically create a favorable long-term environment for stocks, especially in growth and cyclical sectors. Don’t fight the prevailing wind. In other words, don’t fight the Fed.
