How do major asset classes perform after a Federal Reserve rate cut?
On September 17 local time, the Federal Reserve will hold its September rate-setting meeting, which is expected to begin a new round of rate cuts. In August, Fed Chair Powell’s speech at Jackson Hole almost pre-announced the Fed’s September rate cut, and subsequently, moderate employment and inflation data further solidified expectations for a rate cut in September. The market currently expects the Fed to cut rates three times in total within the year. As for the rate cut in September, 95% believe it will be a “preventive rate cut” of 25 basis points.
Looking back at history, the Fed’s “preventive rate cuts” and “recession-driven rate cuts” have different implications for the performance of major asset classes. Taking A-shares and Hong Kong stocks as examples, reviewing the Fed's four rate cut cycles since 2000: In the recession-driven rate cuts after December 2000 and September 2007, A-shares and Hong Kong stocks adjusted due to the impact of the global economic recession; while after the preventive rate cuts by the Fed in July 2019 and September 2024, the market priced in the repair of fundamentals and loose liquidity, and A-shares and Hong Kong stocks rose overall.
Dividing rate cuts into “preventive” and “recession-driven,” and observing the performance of major assets before and after the Fed’s first cut in each round: A-shares: After preventive rate cuts, A-shares benefit from loose liquidity and boosted risk appetite, leading to an increase in prices. At the sector level, technology sectors such as TMT, as well as core consumer assets such as food & beverage, social services, beauty care, and pharmaceuticals & biotech, outperform; after recession-driven rate cuts, A-shares adjust due to global economic recession, and defensive assets such as the non-bank and bank financial sectors and cyclical sectors represented by petrochemicals and chemicals outperform.
Hong Kong stocks: Compared with A-shares, Hong Kong stocks are more sensitive to external liquidity easing, so whether preventive or recession-driven rate cuts, Hong Kong stocks price in loose liquidity and rise as a whole in the short term. Sector performance, however, differs: after preventive rate cuts, staples & discretionary consumption, industrials, and technology perform better, while after recession-driven rate cuts, in addition to pricing in loose liquidity in discretionary consumption and technology, defensive assets such as energy and telecommunications also outperform.
US stocks: After rate cut expectations are realized, fundamentals become the core variable guiding US stocks. Following preventive rate cuts, the market prices in improving fundamentals, and US stocks rise overall; after recession-driven rate cuts, the market prices in deteriorating fundamentals, and US stocks fall overall.
USD: After rate cut expectations are realized, fundamentals also become the main short-term driver for the USD. After preventive rate cuts, the USD is suppressed by rate cuts in the short term, but later prices in improving fundamentals and starts to rise; after recession-driven cuts, as fundamentals worsen, the USD falls overall.
US Treasuries: Similar to the US Dollar Index, after preventive rate cuts, US Treasury yields fall in the short term due to loose liquidity, but later rise as improving fundamentals are priced in; after recession-driven rate cuts, as fundamentals deteriorate, US Treasury yields fall overall.
Gold: After preventive rate cuts, gold prices are boosted in the short term by loose liquidity, but as economic expectations improve and USD and US Treasury yields rebound, gold prices may start to turn downward; following recession-driven rate cuts, gold prices are strongly boosted by both falling USD/US Treasury yields and their safe-haven attribute, and thus rise sharply.
Author: Zhang Qiyao, Source: Yao Wang Market Outlook, Original Title: “【Industrial Securities Strategy Team led by Zhang Qiyao】How will major asset classes perform after the Fed cuts interest rates?”
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