Payden & Rygel: Total return of various asset classes in Fed easing cycles

Payden & Rygel: Total return of various asset classes in Fed easing cycles

7 oktober 2024

Risicomanagement Fed
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After hitting record highs, the equity market wobbled this week on geopolitical concerns. The economic data, however, continue to point toward a 'soft landing' with inflation moderating and the economy gaining new jobs (+254k) at pace fast enough to keep downward pressure on the unemployment rate.

So, we asked ourselves: 'What will happen to risk assets if the Fed continues to cut rates and we avoid a recession?' We look past the headlines and use history as a guide to answer this question.

In the past 16 cutting cycles since 1954, we have seen ten easing cycles coinciding with a recession, as the Fed often reduces rates to support a waning economy. However, there have been periods where the Fed lowered rates without a recession. In these easing cycles, stocks dramatically outperform bonds on average, and small cap stocks have slightly higher returns than large-cap stocks, albeit with significantly more volatility. If the Fed keeps cutting without a recession, markets could "melt up" from here instead of melting down. Risk on?

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