The Federal Reserve’s fee cuts in 2024 reignited a debate acquainted to buyers: do easing cycles prolong expansions or sign looming recession? With inflation nonetheless a menace, the Fed’s subsequent transfer carries actual penalties for portfolios. Historical past affords a information. Previous cycles reveal how financial shifts have influenced recessions, bear markets, and funding kinds management, classes buyers can use as they navigate right this moment’s late-cycle setting.
Echoing Milton Friedman’s remark concerning the “lengthy and variable lags” of financial coverage, this put up examines historic Fed fee cycles to evaluate their relationship throughout quite a lot of market dynamics.
By analyzing previous information, we purpose to offer insights into how financial coverage actions have traditionally influenced yield curves, fashion management, and financial outcomes — insights that may assist buyers interpret right this moment’s cycle.
KEY OBSERVATIONS
Charge Minimize Cycles
Two out of 10 earlier fee reduce cycles averted a recession, with the 2024 reduce cycle marking the third out of 11, if the recession is averted within the present cycle.
Fairness fashion efficiency has been extraordinarily combined after cuts throughout each recessionary and non-recessionary intervals.
Charge Hike Cycles
Throughout 12 fee hike cycles since 1965, we have now skilled 10 yield curve inversions and eight recessions, if the present inversion continues to keep away from a recession.
The one hike cycle that included an inversion however averted a recession was 1966, (much like present interval) coincided with a ~3% deficit/GDP fiscal growth, just like the ~3% fiscal growth over the previous 4 years.
Yield Curve Inversions
The vary of time of a yield curve inversion to market peak was two to fifteen months for the eight out of 9 yield curve inversions that preceded a recession. Presently, we sit at 35 months.
One earlier yield curve inversion (1966) averted a recession, and we noticed development, excessive beta, and high quality kinds main efficiency because the curve normalized, like right this moment.
Determine 1 presents fairness market efficiency throughout three distinct intervals following the Fed’s preliminary fee reduce: months one to12, 13 to 24, and 25 to 36. Whereas returns are usually broadly constructive, the dearth of a constant sample throughout cycles signifies that outcomes are largely influenced by the precise macroeconomic setting by which every easing cycle happens.
Determine 1: Prime 1000 Returns After Charge Cuts.
Disclosures: Previous efficiency isn’t any assure of future outcomes. All of the returns within the chart above are in reference to unmanaged, hypothetical safety groupings created solely for analytical functions. Please see appendix for definitions and citations.
Determine 2 illustrates the historic relationship between Fed rate-cutting cycles, recessions, and bear markets. Evaluation of 12 distinct cycles reveals that in 10 cases, the Fed initiated fee cuts solely after fairness markets had already peaked, suggesting a lag in coverage responsiveness. Moreover, recessions have sometimes been recognized by the Nationwide Bureau of Financial Analysis (NBER) with a delay of 4 to 21 months following their precise onset. Notably, because the extremely risky financial setting of the Seventies, the Fed has extra regularly begun fee cuts previous to the formal recognition of a recession.
Determine 2: Federal Reserve Charge Minimize Cycles.
Disclosures: Please see appendix for definitions and citations.
Determine 3 reveals the efficiency of assorted funding kinds following the initiation of Fed rate-cutting cycles. The information revealed a combined sample of returns, underscoring the idiosyncratic nature of every cycle. One believable rationalization for this variability is that financial easing doesn’t persistently align with fairness market cycles, typically leading to divergent funding fashion conduct. There simply doesn’t appear to be a connection between rate-cut cycles, recessions, and market threat conduct, making fashion persistence inconceivable to anticipate.
Determine 3: Model Extra Returns 1-Yr After First Charge Minimize.
Disclosures: Previous efficiency isn’t any assure of future outcomes. All of the returns within the chart above are in reference to unmanaged, hypothetical safety groupings created solely for analytical functions. These are hypothetical kinds based mostly on describing traits. Please see appendix for definitions and citations. Extra Return is Annualized Return over the Prime 1000 Portfolio.
Since 1965, there have been 12 distinct rate-hiking cycles, of which eight culminated in recessions, 10 had been preceded by yield-curve inversions, and 9 coincided with bear markets (Determine 4). The median length of those cycles is 18 months, starting from 12 to 39 months, whereas the median enhance within the federal funds fee was 3.75%, with a variety between 1.75% and 13%. The median time from the beginning of a climbing cycle to the market peak previous a recession was 22 months, with a variety of 4 to 51 months.
Determine 4: Federal Reserve Charge Hike Cycles.
Disclosures: Please see appendix for definitions and citations.
Within the majority of rate-hiking cycles, the Fed continued to tighten financial coverage even after fairness markets had reached their peak. This sample reinforces the long-held adage that bull markets aren’t ended by previous age, however by the actions of the Fed. Whereas this aggressive stance usually contributes to financial contraction, there are cases the place the Fed has tried to preemptively mitigate recessionary pressures.
In 5 of the eight recessions noticed since 1965, the Fed started slicing rates of interest previous to the official onset of financial contraction, indicating a proactive coverage shift geared toward cushioning the economic system. Nonetheless, as these 5 episodes illustrate, preemptive fee cuts don’t at all times reach averting recessions, underscoring the restrictions of financial coverage as soon as broader financial momentum begins to deteriorate.
The efficiency of funding kinds within the yr following the tip of rate-hiking cycles has been combined, reflecting the cycle-specific nature of financial coverage and market dynamics. This variability probably stems from financial cycles not persistently aligning with fairness market cycles. Within the Seventies, for instance, the Fed usually transitioned instantly from climbing to slicing charges, making post-hike and post-cut return profiles successfully indistinguishable.
One historic sample that continues is that top beta shares are sometimes among the many finest or worst performers and worth and high quality shares are sometimes higher than common and infrequently amongst the worst. This remark can also be persistent following the tip of climbing cycles.
Determine 5: Model Extra Returns 1 Yr After Final Charge Hike.
Disclosures: Previous efficiency isn’t any assure of future outcomes. All of the returns within the chart above are in reference to unmanaged, hypothetical safety groupings created solely for analytical functions. These are hypothetical kinds based mostly on describing traits. Please see appendix for definitions and citations. Extra Return is Annualized Return over the Prime 1000 Portfolio.
Determine 6: Yield Curve Inversions.
Disclosures: Please see appendix for definitions and citations.
Throughout the 12 distinct financial tightening cycles, 10 had been accompanied by yield curve inversions. Of those 10 inversions, eight had been adopted by recessions, underscoring the predictive energy of the yield curve as a number one financial indicator (Determine 5).
Yield curve inversions have traditionally coincided with each recessions and bear markets. The connection between inversion and market peak diverse considerably, starting from 12 months previous to the inversion to fifteen months after. This variability highlights the complexity of market responses to financial coverage shifts.
Two rate-hiking cycles — 1984 and 1995 — stand out as exceptions, having achieved “smooth landings” with out both a yield curve inversion or a subsequent recession. Conversely, the 1966 and 2022 cycles skilled yield curve inversions however averted recessions.
The 1966 cycle is mentioned intimately in our put up, Bear Market Playbook: Decoding Recession Danger, Valuation Affect, and Model Management, the place we attribute the absence of recession to extremely stimulative fiscal coverage. Nonetheless, this coverage backdrop finally contributed to the eventual recession and bear market of 1968.
Parallels will be drawn between the fiscal setting of the mid-Nineteen Sixties and the present financial panorama. In each intervals, elevated deficit spending supported financial exercise. The inversion that started in 2022 ranks because the longest and third most extreme when it comes to length and depth. Regardless of these antagonistic indicators, the US economic system and labor market have demonstrated exceptional resilience.
In keeping with our two prior eventualities, the efficiency of funding kinds within the yr following a yield curve inversion (Determine 7), has exhibited appreciable dispersion, underscoring the cycle-dependent nature of financial coverage and market conduct. Yield curve inversions could sign that the market is getting into the later phases of the financial cycle. In such environments, it’s not shocking to watch outperformance from high quality and development elements, which traditionally have a tendency to steer throughout late-cycle phases on account of their resilient earnings.
Determine 7: Model Extra Returns 1-Yr After Yield Curve Inversion.
Disclosures: Previous efficiency isn’t any assure of future outcomes. All of the returns within the chart above are in reference to unmanaged, hypothetical safety groupings created solely for analytical functions. These are hypothetical kinds based mostly on describing traits. Please see appendix for definitions and citations. Extra Return is Annualized Return over the Prime 1000 Portfolio.
The Fed’s historic rate of interest cycles reveal a constant sample of delayed coverage responses relative to market and financial turning factors, underscoring the “lengthy and variable lags” inherent in financial coverage. Yield curve inversions have confirmed to be a dependable recession indicator, although their timing and market impression stay variable, complicating predictive efforts.
For buyers, the document reveals that no single coverage shift affords a transparent playbook. Charge cuts have produced extremely inconsistent fashion outcomes, underscoring the necessity to look past coverage bulletins to the financial backdrop. Throughout climbing cycles, worth and high quality exposures have traditionally offered steadier efficiency, whereas excessive beta has been a supply of each outsized beneficial properties and sharp losses. After inversions, development and high quality have usually led, with excessive beta once more including upside potential however at increased threat.
The burden of historical past suggests buyers ought to view the present easing cycle via a late-cycle lens. In 1966, the economic system averted recession as fiscal growth prolonged development, and comparable situations exist right this moment. If that parallel holds, portfolios tilted towards kinds reminiscent of high quality and development could proceed to their outperformance, with common higher-beta publicity being favored throughout kinds.
On the identical time, inflation stays the swing issue: a renewed rise might drive the Fed again to tightening, traditionally creating difficult market environments. For buyers, the crucial is to place for resilience whereas staying prepared to regulate if coverage pivots once more.
Appendix & Citations
Figures 2, 4 and 6: Federal Reserve Cycles Knowledge Tables
S&P 500 Index Ranges. FactSet, 2025.
Blinder, Alan. 2023. “Landings, Gentle and Onerous: The Federal Reserve, 1965-2022.” Journal of Financial Views — Quantity 37, No 1 — Winter 2023 — pages 101–120
Federal Reserve Financial institution of New York. The Yield Curve as a Main Indicator.
Federal Reserve Board. Open Market Operations. Board of Governors of the Federal Reserve System, 18 Dec. 2024.
Federal Reserve Board. Adjustments within the Supposed Federal Funds Charge, 1971–1992. 29 Aug. 2019. Board of Governors of the Federal Reserve System.
Nationwide Bureau of Financial Analysis. US Enterprise Cycle Expansions and Contractions.
U.S. Bureau of Financial Evaluation, Actual Gross Home Product [GDPC1], retrieved from FRED, Federal Reserve Financial institution of St. Louis; 1, 2025.
Board of Governors of the Federal Reserve System (US), Federal Funds Efficient Charge [FEDFUNDS], retrieved from FRED, Federal Reserve Financial institution of St. Louis; 5, 2025.
Figures 1, 3, 5 and seven: Efficiency Charts
Knowledge Supply: Compustat
Calculation: Hartford Fairness Modeling Platform
Model and Time Interval Definitions:
Worth: US high 1000 shares high 30% based mostly on composite worth as outlined by a number of equally weighted valuation metrics to reach at an aggregated valuation metric. Valuation metrics embrace: P/E, EBITDA/EV, working money movement/EV, income/EV, and B/P Yield (used solely in financials and actual property as a substitute to EBITDA/EV), then cap weighted.
Low Volatility: US Prime 1000 Shares high 30% based mostly on a Composite Volatility rating outlined by a number of equality weighted volatility metrics to reach at an aggregated volatility metric. Volatility metrics embrace three yr weekly beta and six-month each day commonplace deviation, then cap weighted.
Excessive Volatility: US high 1000 shares backside 30% based mostly on a composite volatility rating outlined by a number of equality weighted volatility metrics to reach at an aggregated volatility metric. Volatility metrics embrace three yr weekly beta and six-month each day commonplace deviation, then cap weighted.
Dividend: US high 1000 shares high 30% based mostly on trailing 12-month dividend per share divided by present share worth, then cap weighted.
High quality: US high 1000 shares high 30% based mostly on gross income to belongings, then cap weighted.
Progress: US high 1000 shares high 30% based mostly on 5 years gross sales development, then cap weighted.
SMID: US mid-sized and small-cap shares representing the smallest 15% and 13% of shares respectively, excluding the very smallest 2% that are categorized as microcap, then cap weighted.
Mega/Massive: US mega and huge market cap shares with mega cap representing the biggest 40% and huge cap representing the following largest 30% of the universe, then cap weighted.
Prime 1000: US Prime 1000 shares, cap weighted.
Yield Curve Inversions are outlined by the 10-year Treasury yield minus the three-month Treasury yield.
