Examining Sector Performance Following the Initial Interest Rate Cut
Federal Reserve Chairman Jerome Powell has indicated that interest rate cuts are imminent, in light of a slowing labor market characterized by fewer job additions and increased unemployment.
Currently, the benchmark interest rate is between 5.25 and 5.50%, a significant increase from the near-zero levels seen in 2022. Historically, equities have shown better performance following gradual rate cuts, as opposed to the rapid reductions typically observed during economic crises. Different sectors of the economy are affected in various ways due to changes in consumer demand and interest rate sensitivity.
A graphic provided by Visual Capitalist's Dorothy Neufeld offers a breakdown of sector performance following the initial interest rate cut, utilizing data from PinPoint Macro Analytics.
Ranking: Sector Performance During Rate Cut Cycles
The following information presents the average performance of each sector in relation to the broad equity market 12 months after the initial rate cut, from 1973 to 2024:
Consumer non-cyclicals tend to see the strongest returns following the initial rate cut, especially during recessions, due to consistent demand for staple goods.
This traditionally defensive sector includes companies such as Procter & Gamble, Walmart, and Coca-Cola. Notably, consumer staples are the only S&P 500 sector to have achieved positive returns on average during the recession stage of the business cycle since 1960. During the slowdown phase, it also outperformed the vast majority of sectors, averaging 15% returns over these periods.
Conversely, the tech sector tends to underperform the market six months after the initial rate cut. However, performance tends to rebound over a 12-month period, as lower interest rates generally benefit growth stocks by reducing borrowing costs. Nonetheless, some of today's largest tech companies have shown resilience to higher rates due to large cash reserves and increased investor interest in AI-related stocks.
Financials, on the other hand, have historically shown the weakest performance. This is because interest rate cuts often indicate that the economy is slowing, which can negatively impact loan growth, credit losses, and default risk.
For a more detailed look at this topic from a sector-composition perspective, refer to this graphic on the largest company in each S&P 500 sector in 2024.
Bottom Line
The performance of different sectors following the initial interest rate cut is a complex issue, influenced by a variety of factors such as consumer demand, interest rate sensitivity, and the overall state of the economy. As we've seen, some sectors, like consumer non-cyclicals, tend to fare better than others, like financials, in these scenarios. But what are your thoughts on this topic? Do you agree with these findings? Share this article with your friends and get their insights as well. And don't forget, you can sign up for the Daily Briefing, which is available every day at 6pm.
Examining Sector Performance Following the Initial Interest Rate Cut
Federal Reserve Chairman Jerome Powell has indicated that interest rate cuts are imminent, in light of a slowing labor market characterized by fewer job additions and increased unemployment.
Currently, the benchmark interest rate is between 5.25 and 5.50%, a significant increase from the near-zero levels seen in 2022. Historically, equities have shown better performance following gradual rate cuts, as opposed to the rapid reductions typically observed during economic crises. Different sectors of the economy are affected in various ways due to changes in consumer demand and interest rate sensitivity.
A graphic provided by Visual Capitalist's Dorothy Neufeld offers a breakdown of sector performance following the initial interest rate cut, utilizing data from PinPoint Macro Analytics.
