To The Moon

What Happens When the Fed Cuts Rates for the First Time?

The Federal Reserve typically lowers interest rates to stimulate economic activity during recessions or slowdowns, which often benefits the stock market.

This analysis examines the performance of the S&P 500 following a rate cut, focusing on forward returns and drawdowns over the next 12 months. The results largely hinge on whether the rate cut signals an upcoming recession.

Not every rate cut leads to a recession, nor does every recession bring a bear market. The chart below illustrates a range of potential outcomes, helping investors navigate the complex narrative around rate cuts and avoid misleading conclusions.

Josh Brown points out two crucial takeaways for investors:

1. The average drawdown in the 12 months following the first rate cut is 11%, only slightly higher than the typical 12-month drawdown of 9%.

2. Excluding recession periods, the average 4% decline over 12 months post-rate cut is relatively mild.

[Allin]How Will Fed's Rate Cut Impact Singaporeans?

Which S-REITs Would Benefit Most From Rate Cut? Look at Analysts' Top Picks!

The Key Tickers Poised to Benefit from Rate Cuts

As high interest rates phase out, three sectors are expected to emerge as winners:

Real Estate Investment Trusts (REITs)

The REIT sector has been hit hard by rising interest rates, which have increased debt financing costs. When rates fall, REITs will see relief as financing costs stabilize. However, the benefits may take time to materialize, as refinancing debt and locking in lower rates require time.

For example, Mapletree Pan Asia Commercial Trust $Mapletree PanAsia Com Tr(N2IU.SI)$ saw its financing costs in the first quarter of FY2025 rise by 9.8% year-on-year to S$59.4 million, despite its net property income increasing by just 0.1% year-on-year.

Similarly, for OUE Commercial Real Estate Investment Trust $OUEREIT(TS0U.SI)$, financing costs in the first half of 2024 rose 18.5% year-on-year, while net property income grew by only 1.6%.

When rates fall, REITs will see relief as financing costs stabilize. However, the benefits may take time to materialize, as refinancing debt and locking in lower rates require time.

Discretionary Consumer Goods

Lower interest rates mean higher disposable income, as people pay less on loans and mortgages, boosting consumer confidence. Businesses also benefit from easier financing, driving economic growth and wealth effects, which in turn increases demand for luxury goods. Companies like The Hour Glass $TheHourGlass(AGS.SI)$, $Ralph Lauren(RL)$, and Prada $PRADA(01913)$ could see increased sales.

Consumer Staples

Higher disposable income also benefits consumer staples. With more money available, consumers are less likely to cut back on essentials, aiding companies like Sheng Siong Group $Sheng Siong(OV8.SI)$, DFI Retail Group $DFIRG USD(D01.SI)$, and international giants like Mondelēz $Mondelez(MDLZ)$, $Kimberly-Clark(KMB)$, and Procter & Gamble $Procter & Gamble(PG)$ .