Samsung Asset Management's Investment Research Center announced on the 4th that an analysis of five US interest rate cut cycles since 1990 revealed that the speed of rate cuts caused significant differences in asset returns.
On the same day, Samsung Asset Management's Investment Research Center released a report titled ‘Interest Rate Cut Cycles and Asset Markets,’ analyzing that the key variable determining the financial market trends before and after rate cuts is the speed of the rate cuts.
According to the report, when interest rates are cut gradually by 25bp, both stocks and bonds can show simultaneous strength. In fact, during the periods of gradual 25bp cuts in the second half of 1995 and 2019, there was a simultaneous rise in US stock prices and bond prices (interest rate decline). This is analyzed to be because the economic flow was stable with a soft landing (gradual decline), and gradual rate cuts were implemented as a form of insurance against potential risks from economic downturns, which positively affected the financial markets.
In contrast, if the speed of rate cuts accelerates sharply to 50bp or more, the market is more likely to interpret the rate adjustments as a response to an economic recession, leading to a clear differentiation between stocks and bonds. In the past, during 1990, 2001, 2007, and 2020, concerns about economic recessions led to relatively rapid and large rate cuts, causing stocks to experience significant declines due to recession fears. Meanwhile, bonds saw a strong price increase as demand for safe-haven assets expanded. In fact, in all four cases, recessions occurred following the sharp rate cuts.
Samsung Asset Management's Investment Research Center expects the US Federal Reserve to start the first rate cut in June this year and to proceed with gradual cuts of 25bp per quarter. Currently, the US economy is maintaining a favorable trajectory far from recession, and by April to May, the core Personal Consumption Expenditures (PCE) price index referenced by the Fed is expected to enter the mid-2% range, creating conditions for an insurance-type rate cut in June.
Meanwhile, analyzing US interest rate cut cycles since 1990 shows that in the three months before the first cut, bond returns were relatively better than stock returns. This is interpreted as the bond market reflecting expectations of rate cuts earlier than the stock market. Conversely, the stock market showed a box range movement until the first cut.
A notable point is that stocks showed differentiated price movements before the first cut depending on the expected speed of rate cuts linked to the US economic trend. In situations like the current favorable US economy, where gradual cuts are expected, stock price differentiation appeared mainly in advanced countries such as the US. However, when expectations formed that the US economy would slow and the speed of cuts would increase, emerging market stocks showed clear strength.
Considering the current favorable US economic conditions, Samsung Asset Management advised that an investment strategy focusing on US and Korean long-term government bonds and large-cap US stocks is necessary until the first rate cut.
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