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How do stocks, bonds and cash perform when the Fed starts cutting rates?

New long-term analysis digs into returns during 22 rate-cutting cycles since 1928.

How do stocks perform after the Fed starts to cut rates?


Duncan Lamont, CFA
Head of Strategic Research, Schroders

In the 12-months after the US Federal Reserve (Fed) starts cutting interest rates, the average return from US stocks has been 11% ahead of inflation. Stocks have also outperformed government bonds by 6% and corporate bonds by 5%, on average.

Cash has been left even further in their wake. Stocks have beaten cash by 9% in the 12 months after rates start to be cut, on average. Bonds have also been a better place to be than cash.

These outcomes are the findings of new, long-term, analysis of investment returns during 22 US interest rate cutting cycles since 1928 – see Figure 1.

Table showing outperformance of stocks vs bonds and cash after first Fed rate cut

Stocks prefer it if a recession can be avoided, but have usually coped ok even if one wasn’t

These returns are even more impressive considering that, in 16 of the 22 cycles, the US economy was either already in a recession when cuts commenced, or entered one within 12 months.

Recession dates are marked in Figure 1 and shaded in Figure 2, below.

Stock returns were better if a recession was avoided but, even if it wasn’t, they were still positive on average.

How do stocks perform after the Fed starts to cut rates?

There are big exceptions, and a recession is obviously not something to be welcomed but – for stock market investors – it has not always been something to unduly fear either.

Bond investors, in contrast, tend to do better if a recession occurs. They usually benefit from safe-haven buying (especially government bonds), which drives yields lower and bond prices higher. But they’ve also done ok if a recession was avoided.

Corporate bonds have outperformed government bonds, on average, in the more economically-rosy scenario.

The range of historical returns is wide for stocks and bonds, but both have tended to do well when the Fed has started cutting rates.

What about today? Unlike most historical episodes, the Fed is not considering cutting rates because it’s worried that the economy is too weak. It is doing so because inflation is going in the right direction, meaning policy does not have to be so restrictive.

If it is right, and can engineer a “soft landing”, then 2024 could be a good year for stock market investors and bond investors.

This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.

All data contained within this document is sourced from Cazenove Capital unless otherwise stated.


Duncan Lamont, CFA
Head of Strategic Research, Schroders


The value of your investments and the income received from them can fall as well as rise. You may not get back the amount you invested.