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October 2024



Core Equity: Equity Investing in a “Rate-Cut” Cycle  




Amy Chen Director
  • The pace of Fed easing may have an impact on the trajectory of market returns.
  • Remain focused on a balanced long-term approach.
  • Continue to prefer secular growth themes.

With inflation easing, the Federal Reserve has started the process of lowering its key policy rate out of restrictive territory. Historically, rate cuts by the Fed have often been followed by recession, though sometimes this is due to factors entirely unrelated to monetary policy. For instance, the Fed lowered rates in 2019, but the recession that began in 2020 was triggered by the global pandemic. Still, while history never repeats itself, it does often rhyme. And making the situation today further complicated is the upcoming U.S. presidential election. Consumer and corporate spending tend to waver ahead of such elections due to uncertainties regarding future governmental policy changes. So, how should we navigate through all these cross currents?  

 

Chart 1: Fed Rate Cuts Have Often Been Followed by Recession 
 

 

Source: Federal Reserve Bank of St. Louis, as of September 2024.

Information is subject to change and is not a guarantee of future results.

Indices are unmanaged, and one cannot invest directly in an index.




The straightforward answer is to avoid speculation on election outcomes or the size of the next Fed rate cut, whether it be 25 bps or 50 bps. Instead, we remain focused on a balanced long-term approach, investing in secular growth themes, such as the digital revolution, healthcare innovators, durable consumer franchises, industrial leaders and a clean climate. At the same time, we remain watchful of potential short-term market dislocations and prepared for what may lie ahead.

Our base case anticipates a slow-easing cycle ahead, aka a soft landing. With inflation cooling, consumers are expected to have more money at their disposal, supporting strong holiday retail sales. In such a scenario, the Consumer Discretionary and Consumer Staples sectors are good places to invest. Lower rates would boost existing home sales, which in turn could drive spending on home improvements, furniture and electronics. We also maintain a positive outlook on the Technology sector, given its close ties to consumer sentiment and e-commerce, not to mention the transformative potential of AI, which could unlock significant productivity gains in the years ahead.

In the event of a “hard landing” for the economy, leading to a fast-easing cycle, defensive sectors typically outperform, such as Consumer Staples and Healthcare. Larger-than-expected rate cuts would result in a downward shift in the yield curve, pushing up the net asset value of so-called “bond proxies,” like REITs and Utilities, making them attractive investments during recession periods. 

Regardless of whether we experience a slow- or fast-easing cycle, historical data suggests sector performance tends to converge within two years following the initial Fed rate cut. That reinforces our strategy of focusing on long-term secular growth themes rather than reacting to short-term sector rotations.

Chart 2: Cyclical vs. Defensive Performance Around Initial Fed Rate Cuts
 

Source: Bloomberg, NDR Research, as of September 2024.

Information is subject to change and is not a guarantee of future results. 

Slow Cycles: 02/05/1954, 11/15/1957, 06/10/1960, 11/19/1971, 05/30/1980, 11/21/1984, 07/06/1995, 09/29/1998. 

Fast Cycles: 11/13/1970, 12/09/1974, 11/02/1981, 06/06/1989, 01/03/2001, 09/18/2007, 07/31/2019. 

 

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