Rate Cut: Historical Insights for Portfolio Positioning

Considerations for Portfolio Positioning Given the Fed is Signaling a Rate Cut.

The Federal Reserve has sent clear signals: The era of interest rate hikes begun in March 2022 is over and it’s time to start cutting rates. Investors are parsing through the Fed’s signals and economic data to see how much of a rate cut to expect at the next meeting.  Investors may want to consider if their portfolios are positioned for a new rate regime, or if adjustments should be made. 

Unique Factors

While historical analysis suggests that the best time to position for a rate cut is in the months leading up to it, the potential for a rate cut later this month is a bit unique for two reasons. September is seasonally one of the weakest months for stock market returns and it’s an election year. Volatility in the equity markets is typically higher heading into an election. All these factors coinciding may present a unique opportunity for investors across a variety of asset classes. 

The Coming Regime Shift?

The Federal Funds Rate has held steady this year at its highest level since 2001. The Fed began raising it in March 2022 to bring down high inflation and with the goal of engineering a “soft landing” of the economy, where growth slows, but the economy does not slip into a recession.

There are basically two main reasons the Fed may start cutting rates:

• First, the Fed is likely to cut as inflation has fallen near their target zone of 2%. Fed Chairman Jerome Powell recently said, “It is unlikely that the labor market will be a source of elevated inflationary pressures anytime soon."¹
• Second, the Fed may cut rates in the hopes of jump-starting a slowing economy. Clear indications of a rapidly contracting economy, such as weak employment figures like the recent July and August Jobs reports, or other signs pointing toward a recession, may prompt the Fed to lower rates more quickly to prevent an economic downturn. Chairman Jerome Powell made it clear at his late August press conference that the cooling in the labor market has been “unmistakable.”¹

Although the amount of the cut is still uncertain, it seems that they are likely to begin in the coming weeks.

Implications: What History Tells Us

In general, what investors consider higher quality assets – for example, U.S. Treasuries, the classic safe haven during economic turmoil, as well as value stocks, considered to be more stable companies --perform best in the periods leading up to and following a rate hike. As the chart below demonstrates, those asset classes outperform their competitors in the three months leading up to, and following, a rate hike. 

Notably, most of this outperformance occurs before the initial rate cut, as investors begin to respond to expectations of lower rates. Investment grade bonds also perform well, which are similarly considered more stable. 

It’s worth mentioning, however, that historically there is follow-through on asset class performance  after the first rate cut, most notably in large cap equity but also across fixed income.

Over a slightly longer time frame of six months before and six months after the first rate cut, the performance differences become even more pronounced. Historically, as the chart below shows, 10-year U.S. Treasuries have returned nearly 16% over that period, while value stocks and investment grade bonds rose roughly 10%.

To be sure, no one can guarantee what happened in the past will reoccur. However, there’s an old saying that history doesn’t repeat itself, but it often rhymes. In the past, when the signals were flashing that a rate cut was coming, investors responded by repositioning their portfolios. It may well be time to consider similar steps.

Related ETFs

Treasuries

• ISWN: Amplify BlackSwan ISWN ETF (International)
• QSWN: Amplify BlackSwan Tech & Treasury ETF
• SWAN: Amplify BlackSwan Growth & Treasury Core ETF

Corporate Bonds

• YYY: Amplify High Income ETF

Value

• COWS: Amplify Cash Flow Dividend Leaders ETF
• DIVO: Amplify CWP Enhanced Dividend Income ETF
• HCOW: Amplify Cash Flow High Income ETF
• IDVO: Amplify International Enhanced Dividend Income ETF

Growth

• QDVO: Amplify CWP Growth & Income ETF

Past performance is no guarantee of future results.

¹https://finance.yahoo.com/news/job-openings-fall-to-lowest-level-since-january-2021-142343052.html

The 10 Year Treasury is represented by the Bloomberg US Treasury Bellwethers 10 Year Total Return Index that measures the on-the-run (most recently auctioned) U.S. Treasury bond with 10 years’ maturity.

The value equity is represented by the Russell 1000^® Value Total Return Index that measures the performance of the large-cap value segment of the US equity universe.

The investment grade bonds are represented by the Bloomberg US Agg Total Return Index that measures the investment grade, US dollar-denominated, fixed rate taxable bond market.

The large cap equity index is represented by the S&P 500 Total Return Index, which is a market-capitalization weighted index of the 500 largest U.S. publicly traded companies.

The high yield bonds are represented by the Bloomberg US Corporate High Yield Total Return Index that measures the USD-denominated, high yield, fixed-rate corporate bond market.

The mid cap equity index is represented by the Russell Midcap® Index that measures the performance of the mid-capitalization segment of the U.S. equity universe. 

The growth equity is represented by the Russell 1000^® Growth Total Return Index that measures the performance of the large-cap growth segment of the US equity universe. 

The small cap equity index is represented by the  Russell 2000 Total Return Index that measures the performance of the small-cap segment of the US equity universe.