The first rate cut: Positive or negative for global equities? By

-- In a Wednesday note to clients,icmarkets handling fee Bank of America analyzed the impact of the U.S. Federal Reserve's initial rate cuts on global equity markets. The note reviewed the last six U.S. easing cycles and found that the subsequent performance of the MSCI AC World Index varied significantly based on whether a recession was avoided in the following year.

According to the report, in the three instances where a U.S. recession occurred after the first rate cut, the MSCI AC World Index experienced an average decline of 10% over the subsequent 12 months. In contrast, in cycles where a recession was prevented, the index saw an average increase of 14% in the year following the first rate cut.

“Currently, our indicators of the global cycle are positive, suggesting the recent rate cut by the US Fed could be interpreted as a bullish signal for equity markets,” analysts highlighted.

Analysts also emphasized that “it’s all about the ‘why’,” referring to the importance of understanding the reasons behind the Fed's decision to lower rates.

If the Fed's recent easing was in response to a looming recession, it could signal a negative outlook for global equities. Oppositely, if the rate cut was primarily due to inflation nearing the target range, it might be seen as a positive indicator for equity markets.

BofA also examined the performance of investment styles post-easing. It noted that when a recession was averted, the cyclical Risk style outperformed the defensive Quality style by an average of 14.4% over the next 12 months. In scenarios where a recession followed, Risk underperformed Quality by an average of 19.4%.

“Our analysis suggests tilting towards cyclical styles,” analysts said.

The Fed will likely lower interest rates by another half point before the end of 2024, with two more policy meetings left this year.

The central bank’s dot plot shows that 19 FOMC members project the fed funds rate to reach 4.4% by year-end, aligning with a target range of 4.25% to 4.5%. The next meetings are set for Nov. 6-7 and Dec. 17-18.

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