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although it is still uncertain whether the fed will cut interest rates by 25 basis points or 50 basis points tonight, no matter how much the rate cut is, the start of the fed's easing cycle is a foregone conclusion. and it is foreseeable that the fed's steps in this easing cycle are likely to be large:

market traders currently expect the fed to have cut interest rates by a cumulative 250 basis points by the end of 2025, lseg data showed.

so, as the federal reserve once again stands at the "crossroads" of a major monetary policy shift, from a historical perspective, what impact will the fed's interest rate cuts have on the trends of the stock market, bond market, and foreign exchange market?

in this regard, multiple historical statistics show that after the federal reserve officially launched the interest rate cut cycle,the performance of the dollar, u.s. treasuries and the greenback may depend primarily on one factor: the health of the u.s. economy.

evercore isi's market statistics dating back to 1970 show that if the us economy encounters a recession, the s&p 500 index will fall an average of 4% within six months after the first rate cut in the easing cycle. in contrast, when the fed cuts interest rates in non-recessionary periods, the s&p 500 index will rise an average of 14% within six months.

“if the economy falls into recession, the support from rate cuts will not be enough to offset the decline in corporate profits and the high level of uncertainty and lack of market confidence,” said keith lerner, co-chief investment officer at truist advisory services in washington.

in addition, in the bond and foreign exchange markets, u.s. treasuries tend to perform better in a recessionary interest rate cut cycle, because investors will be more eager for the safety that safe-haven assets such as u.s. treasuries can bring. the dollar tends to rise less during a recession, although its performance may depend on the performance of the u.s. economy compared with other countries...

us stocks

normally, the national bureau of economic research (nber) is responsible for determining whether the u.s. economy is in recession, but its results are lagging.while some warning indicators are starting to flash red, economists see little evidence that the u.s. is experiencing a recession.

if this continues, it will bode well for the current rebound in u.s. stocks.

“based on previous easing cycles, our expectations for aggressive fed rate cuts and no u.s. recession are consistent with strong returns for u.s. stocks,” james reilly, senior market analyst at capital economics, said in a note.

of course, concerns about the economic outlook have actually caused sharp fluctuations in asset prices in recent weeks: signs of weakness in the u.s. labor market once triggered sharp fluctuations in the s&p 500 index, while concerns about global economic growth were reflected in the plunge in commodity prices - brent crude oil is currently trading close to its lowest level since the end of 2021.

people's suspicion about whether the us economic growth rate will simply fall back to its long-term trend or show signs of a more serious slowdown is actually the main reason why the interest rate futures market has recently "jumped back and forth" during the expectations of a 25 basis point or 50 basis point rate cut.

the following chart shows the performance of the s&p 500 index after the "first" interest rate cut in each easing cycle of the federal reserve since 1987. the statistics divide the federal reserve's interest rate cuts into three categories, namely, interest rate cuts based on the need for "normalization" of interest rates, interest rate cuts due to market "panic" (such as black monday), and interest rate cuts in the context of economic recession:

it is not difficult to see that the state of the economy is important for investors to measure the long-term performance of u.s. stocks. according to research by ryan detrick, chief market strategist at carson group,one year after the first rate cut during a recession, the s&p 500 fell an average of nearly 12%. by contrast, in non-recessionary periods, when rate cuts were necessary to “normalize” interest rates, stocks rose an average of 13% a year after the cut.

michael arone, chief investment strategist at state street global advisors, said the key to the whole thing is whether the economy can avoid a recession.

of course, if we don’t distinguish between recessions and non-recessions, the s&p 500 has risen an average of 6.6% in the year after the first rate cut. however, this may not be a particularly outstanding “scorecard” - this performance is about one percentage point lower than the average annual return since 1970.

in terms of specific sectors, among the 11 major sectors of the s&p 500 index, the consumer staples and consumer discretionary industries performed best on average one year after the rate cut - with an increase of about 14%, followed by the healthcare industry (12%) and the technology industry (nearly 8%).

seen as highly sensitive to signs of economic improvementsmall-cap stocksthey also tend to outperform - the russell 2000 index rose an average of 7.4% in the year after the first rate cut.

us treasury bonds

when the fed's rate cut cycle began, u.s. treasuries have always been one of the most popular investment options for investors. however, at present, u.s. treasuries have actually rebounded sharply before the rate cut, which makes some investors believe that unless the economy enters a recession, it is unlikely that the u.s. treasury bulls will further expand their gains.

as we all know, treasury yields are inversely proportional to bond price movements. when the federal reserve eases monetary policy, u.s. treasury yields tend to fall as interest rates fall. the long-standing reputation of u.s. treasury bonds as a safe haven also makes them a popular investment target during periods of economic uncertainty.

thus,the good or bad economic outlook also has a very obvious impact on the trend of us bonds. citi strategists found that the median return rate of the bloomberg us treasury index in the 12 months after the first interest rate cut can reach 6.9%, but only 2.3% in the case of a "soft landing" of the economy.

dirk willer, global head of macro and asset allocation strategy at citi, said that if there is no so-called hard landing of the economy - forcing the federal reserve to cut interest rates further than expected, then further gains in u.s. treasuries may not be so certain. willer pointed out that "if the economy encounters a hard landing, there will be a lot of money pouring into the bond market. if it is a soft landing, the situation is really a little unclear."

in addition to economic performance, buying early may also be key.data from creditsights shows that in the past 10 rate cut cycles, the 10-year u.s. treasury yield fell an average of 9 basis points in the month after the first rate cut, and climbed 59 basis points a year after the first rate cut - because investors have begun to price in economic recovery at this time.

dollar

how will the fed's rate cuts affect the dollar? historically, the u.s. economy and the actions of other central banks are two important factors in determining how the dollar reacts during the fed's easing cycle.

let’s start with economic factors. a recession often requires the federal reserve to implement larger interest rate cuts, and lower interest rates will weaken the dollar’s ​​appeal to investors seeking income.

goldman sachs' analysis of the past 10 fed rate-cutting cycles shows that the dollar gained 7.7% against a basket of trade-weighted currencies a year after the first rate cut, median, when the economy was not in recession. by contrast, when the u.s. economy was in recession, the dollar gained just 1.8% over the same period.

meanwhile, according to another goldman sachs analysis, the dollar tends to outperform other currencies when the u.s. and multiple non-u.s. central banks cut rates at the same time, while the dollar tends to underperform when the fed cuts rates at the same time as relatively few non-u.s. banks.

currently, major central banks around the world, including the european central bank, the bank of england and the swiss national bank, are also cutting interest rates. the ice dollar index, which measures the strength of the dollar against a basket of currencies, has continued to weaken since late june, but is still up about 9% over the past three years.

“the u.s. economic growth is still a little bit better than most countries,” said yung-yu ma, chief investment officer at bmo wealth management. “even though the dollar has strengthened significantly (in the past few years), we don’t expect the dollar to weaken significantly.”

analysts at bnp paribas disagree. the bank said this could change if u.s. economic growth is weak. "we believe that the fed is likely to cut interest rates more than other central banks amid potential recession risks, further eroding the (dollar's) yield advantage and making the dollar vulnerable."