Weekly Market Summary

Extra Credit^*

• At its January meeting, the Federal Reserve’s Federal Open Market Committee (FOMC) held the federal funds target rate range at a 23-year high of 5.25% to 5.50%. Fed Chair Jerome Powell indicated rate cuts are not imminent due to inflation worries.
• The FOMC also added language in its January statement about interest-rate cuts, stating, “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.” 
• When looking at historical asset-class performance near and after the first interest-rate cut of Federal Reserve cutting cycles since 1984, investment-grade corporate bonds have outperformed broad investment-grade bonds and U.S. Treasuries. Over the past four decades, there were 10 cutting cycles. Four were associated with recessions (1990, 2001,2007, and 2020), and six were non-recessionary episodes where cutting was motivated by trying to normalize (1984, 1989, 1995) or were growth scares (1987, 1998, 2019).
• While every rate-cutting cycle is different and the sample size is not especially large, here are some observations over the past 40 years: 1) Equities tended to rally after the Fed started to cut in non-recessionary cutting cycles. In contrast, equities tended to decline even after the Fed began cutting rates when the event was motivated by a recession. This was especially true once the 2020 COVID recession is omitted. In both the 2001 and 2007 recessions, equities did not bottom out until more than a year after the Fed began to cut. 2) Both front- and long-end yields declined in anticipation of and after the first cut, but this decline was limited in non-recessionary cutting cycles, and the decline in yields was relatively quickly reversed. To be more specific, yields continued to decline significantly after cuts began only when the easing was in response to a large negative-growth shock. 3) Yield curves tended to steepen, but again this was largely when easing was due to recession as the front end persistently declined more than the back end of the curve. 4) The trade-weighted USD tended to stay roughly flat for the first several months after the first Fed cut, before strengthening on a one-year horizon, although this USD strength came sooner in non-recessionary than recessionary episodes. The yen, a classic safe-haven currency, tended to appreciate against the dollar after the first cut in recessionary cutting cycles.
• Bank-loan and high-yield bond default rates, excluding distressed exchanges, finished the month at 1.95% and 2.04%, respectively, down from 2.10% and 2.08% in December. The 25-year historical default rate for loans and high-yield bonds is 3.0% and 3.4%, respectively.

Sources: Bloomberg and JP Morgan as of 2/5/24.

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