The Federal Reserve’s price cuts in 2024 reignited a debate acquainted to buyers: do easing cycles lengthen expansions or sign looming recession? With inflation nonetheless a menace, the Fed’s subsequent transfer carries actual penalties for portfolios. Historical past gives a information. Previous cycles reveal how financial shifts have influenced recessions, bear markets, and funding kinds management, classes buyers can use as they navigate at this time’s late-cycle setting.
Echoing Milton Friedman’s statement relating to the “lengthy and variable lags” of financial coverage, this publish examines historic Fed price cycles to evaluate their relationship throughout a wide range of market dynamics.
By analyzing previous information, we intention to supply insights into how financial coverage actions have traditionally influenced yield curves, type management, and financial outcomes — insights that may assist buyers interpret at this time’s cycle.
KEY OBSERVATIONS
Charge Lower Cycles
Two out of 10 earlier price lower cycles averted a recession, with the 2024 lower cycle marking the third out of 11, if the recession is averted within the present cycle.
Fairness type efficiency has been extraordinarily blended after cuts throughout each recessionary and non-recessionary intervals.
Charge Hike Cycles
Throughout 12 price hike cycles since 1965, we now have 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 enlargement, just like the ~3% fiscal enlargement 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 at this time.
Determine 1 presents fairness market efficiency throughout three distinct intervals following the Fed’s preliminary price lower: 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 particular macroeconomic setting through 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 completely 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 situations, the Fed initiated price 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, for the reason that extremely unstable financial setting of the Nineteen Seventies, the Fed has extra steadily begun price cuts previous to the formal recognition of a recession.
Determine 2: Federal Reserve Charge Lower Cycles.
Disclosures: Please see appendix for definitions and citations.
Determine 3 exhibits the efficiency of varied funding kinds following the initiation of Fed rate-cutting cycles. The info revealed a blended sample of returns, underscoring the idiosyncratic nature of every cycle. One believable rationalization for this variability is that financial easing doesn’t constantly align with fairness market cycles, typically leading to divergent funding type conduct. There simply doesn’t appear to be a connection between rate-cut cycles, recessions, and market danger conduct, making type persistence unattainable to anticipate.
Determine 3: Fashion Extra Returns 1-Yr After First Charge Lower.
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 completely 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 have been preceded by yield-curve inversions, and 9 coincided with bear markets (Determine 4). The median period of those cycles is 18 months, starting from 12 to 39 months, whereas the median improve within the federal funds price was 3.75%, with a variety between 1.75% and 13%. The median time from the beginning of a mountaineering 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 usually are not ended by previous age, however by the actions of the Fed. Whereas this aggressive stance usually contributes to financial contraction, there are situations the place the Fed has tried to preemptively mitigate recessionary pressures.
In 5 of the eight recessions noticed since 1965, the Fed started chopping rates of interest previous to the official onset of financial contraction, indicating a proactive coverage shift aimed toward cushioning the financial system. Nonetheless, as these 5 episodes illustrate, preemptive price cuts don’t all the time reach averting recessions, underscoring the constraints of financial coverage as soon as broader financial momentum begins to deteriorate.
The efficiency of funding kinds within the 12 months following the top of rate-hiking cycles has been blended, reflecting the cycle-specific nature of financial coverage and market dynamics. This variability possible stems from financial cycles not constantly aligning with fairness market cycles. Within the Nineteen Seventies, for instance, the Fed usually transitioned immediately from mountaineering to chopping charges, making post-hike and post-cut return profiles successfully indistinguishable.
One historic sample that continues is that prime beta shares are sometimes among the many finest or worst performers and worth and high quality shares are sometimes higher than common and barely amongst the worst. This statement can be persistent following the top of mountaineering cycles.
Determine 5: Fashion 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 completely 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 have been accompanied by yield curve inversions. Of those 10 inversions, eight have 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 diversified 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 “comfortable 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 publish, Bear Market Playbook: Decoding Recession Threat, Valuation Impression, and Fashion Management, the place we attribute the absence of recession to extremely stimulative fiscal coverage. Nonetheless, this coverage backdrop in the end contributed to the eventual recession and bear market of 1968.
Parallels may be drawn between the fiscal setting of the mid-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 by way of period and depth. Regardless of these adversarial alerts, the US financial system and labor market have demonstrated exceptional resilience.
In step with our two prior eventualities, the efficiency of funding kinds within the 12 months 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 coming into the later phases of the financial cycle. In such environments, it’s not stunning to look at outperformance from high quality and development elements, which traditionally have a tendency to guide throughout late-cycle phases attributable to their resilient earnings.
Determine 7: Fashion 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 completely 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 exhibits that no single coverage shift gives a transparent playbook. Charge cuts have produced extremely inconsistent type outcomes, underscoring the necessity to look past coverage bulletins to the financial backdrop. Throughout mountaineering cycles, worth and high quality exposures have traditionally supplied steadier efficiency, whereas excessive beta has been a supply of each outsized positive factors and sharp losses. After inversions, development and high quality have usually led, with excessive beta once more including upside potential however at larger danger.
The burden of historical past suggests buyers ought to view the present easing cycle by way of a late-cycle lens. In 1966, the financial system averted recession as fiscal enlargement prolonged development, and related circumstances exist at this time. If that parallel holds, portfolios tilted towards kinds equivalent to 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 power 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 Information Tables
S&P 500 Index Ranges. FactSet, 2025.
Blinder, Alan. 2023. “Landings, Delicate and Exhausting: The Federal Reserve, 1965-2022.” Journal of Financial Views — Quantity 37, #1 — Winter 2023 — pages 101–120
Federal Reserve Financial institution of New York. The Yield Curve as a Main Indicator. https://www.newyorkfed.org/analysis/capital_markets/ycfaq.html.
Federal Reserve Board. Open Market Operations. Board of Governors of the Federal Reserve System, 18 Dec. 2024. https://www.federalreserve.gov/monetarypolicy/openmarket.htm.
Federal Reserve Board. Adjustments within the Meant Federal Funds Charge, 1971–1992. 29 Aug. 2019. Board of Governors of the Federal Reserve System. https://www.federalreserve.gov/foia/information/20190829-changes-intended-federal-funds-rate.pdf
Nationwide Bureau of Financial Analysis. US Enterprise Cycle Expansions and Contractions. https://www.nber.org/analysis/information/us-business-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; https://fred.stlouisfed.org/collection/GDPC1, Might 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; https://fred.stlouisfed.org/collection/FEDFUNDS, September 5, 2025.
Figures 1, 3, 5 and seven: Efficiency Charts
Information Supply: Compustat
Calculation: Hartford Fairness Modeling Platform
Fashion 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 circulate/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 12 months weekly beta and six-month each day customary 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 12 months weekly beta and six-month each day customary 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 earnings to property, 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 categorised as microcap, then cap weighted.
Mega/Giant: US mega and huge market cap shares with mega cap representing the biggest 40% and huge cap representing the subsequent 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.
