As advisors anticipate the impact of the new fed rate-cut cycle on client portfolios, the conventional wisdom is that cyclical stocks—things like automotive, airlines and consumer goods names—will benefit the most.
While a lot of historical data suggests this could happen, advisors who focus on it too much may miss opportunities, since the data also suggests that less obvious parts of the market may fare better.
Unlike most first cuts made in a cycle, the 50-basis-point cut announced by the central bank in September didn’t come in a sluggish or recessionary economic environment. Actually, it came amid a particularly resilient economy that, while slowing somewhat, is still growing.
Hootie & The Blowfish
According to Forbes, the last time the Fed cut rates in a growing economy was 1995, a year when the S&P 500 was net positive and tech stocks were mustering before their rapid ascent in the late ’90s.
The rate-cutting cycle that began in July of 1995 came as more affordable personal computers proliferated in households and the band Hootie & the Blowfish rose to success.
Contrary to what many advisors believe today, the 1995 rate-cutting cycle didn’t resuscitate a dormant trade in cyclicals. While financials did all right after this first cut, most cyclicals declined, while some defensives ascended.
Over the six months after that first 1995 cut, consumer staples outperformed the S&P 500 by 4.9 percentage points. Healthcare did much better, outperforming by 14.8 percentage points.
Some of these gains may have come from siphoned-off tech investments. Despite strong growth in the first half of ’95, tech hit a performance top around the time of the Fed’s first cut and then promptly headed downward, remaining contained for about six months.
By the time Hootie & the Blowfish lead singer Darius Rucker switched to country music in 2008, tech had been leading the market with meteoric growth for more than a decade.
1995 Revisited?
Outcomes from the 1995 cycle may hold clues to sector performance during and after this new, belated round of rate cuts.
Currently, as in 1995, the beginning of this cycle roughly coincides with a pause in the upward ascent of the Nasdaq-100, which underperformed the S&P 500 between July and late September. That, along with improved performance of the equal-weighted S&P 500, suggests the overall market’s performance is broadening away from tech, which is reminiscent of what occurred early in the 1995 cycle.
Also, the new rate-cutting cycle is similar to that of 1995 when we look at the macro-economic environment. For example, as it is today, the dollar was weak in 1995; it gained strength during the cutting cycle.
In the months before the most recent Federal Reserve action, an inverted yield curve unsettled many advisors. But the degree of inversion has diminished significantly and now reflects a more “normal” rate spread. The yield curve behaved in similar fashion approaching the first cut in ’95.
But there are differences, of course. The markets of 1995 and 2024 are different creatures, with different investor sentiments; anyone looking at historical clues for the way sectors will behave in the next year or two should probably look at several rate cycles, not just these two.
Undeniably, some cyclical stock names have done quite well amid the cuts—notably, materials, which has outperformed during the last three cycles.
Increasingly Healthy
But the sector that’s emerged as perhaps the most consistent outperformer in these rate periods is healthcare. After outperforming the S&P 500 in 1995, healthcare did it again in the two-year periods after the Fed started slashing rates in 2001, 2007 and 2019.
Though healthcare is a classic defensive sector, it has recently acquired offensive characteristics: It has enjoyed secular growth, its earnings growth is projected to accelerate, and its margins are projected to expand. Though it languished in recent years, it’s shown vitality in 2024, posting solid performance. At the outset of this new Fed cycle in late September, one exchange-traded fund, the Health Care Select Sector SPDR Fund (XLV), was up about 19% for the preceding 12 months.
Though this sector is characteristically impervious to demand declines amid rising unemployment—since insured people will always seek care regardless of their financial situation—the sector can also be a political punching bag because of consumer costs, especially drug prices. Yet, as of early October, the sector had avoided excessive berating by the big presidential campaigns (though this could change before the election).
Charging Up
Another defensive sector that may be poised to perform in this new cut cycle is utilities, which has recently received more attention from investors growing aware of artificial intelligence’s huge power demands.
Even before “AI” was on everyone’s lips, data centers were already sucking up increasing amounts of power for myriad rechargeable battery-operated products: electric cars, robotic vacuum cleaners, lawn mowers, cell phones and all manner of other wireless devices. Another ETF, the Utilities Select Sector SPDR Fund (XLU), was up more than 30% for the 12 months ended in late September.
Though the likely overall market impacts of this new rate-cut cycle are probably already baked into equity prices to a large extent, the new ones to come aren’t likely to hurt many stocks. After all, the costs of issuing bonds will decline with prevailing interest rates as the Fed continues slicing—probably in 25-basis-point increments.
Given the lower costs of issuing bonds, corporations will have more unencumbered cash to invest in their enterprises and pay off existing bonds, brightening balance sheets.
Future cuts in increments of 25 basis points would be a methodical pace consistent with the months of methodical Fed talk that preceded the first cut.
Though the market has historically favored such small cuts, it has nevertheless welcomed the larger 50-basis-point cut that kicked off the Fed’s current round, perhaps because the move was so long in coming.
Barring negative impacts from unexpected exogenous events, the market’s welcome wagon for the new cycle will probably continue rolling through 2025 and into 2026, with sector outcomes less likely to surprise advisors who have taken a close look at market history.
Dave Sheaff Gilreath, CFP, is a founder and chief investment officer of Sheaff Brock Investment Advisors, a firm serving individual investors, and Innovative Portfolios, an institutional money management firm. Based in Indianapolis, the firms were managing assets of about $1.4 billion as of June 30.