In the summer of 1995, significant events were unfolding. NASA’s space endurance record, which once stood at a modest 84 days, was shattered by two astronauts who, while not stranded, faced the possibility of spending eight months in weightlessness. Johnnie Cochran was captivating the public with his poetic defense, and the movie Waterworld was struggling at the box office.
During this time, the Federal Reserve, under Alan Greenspan’s leadership, initiated an interest rate-cutting cycle. This period may hold important lessons for today’s markets as they anticipate a similar move in the coming months.
The 1995 cycle was marked by disinflation and a soft economic landing that crucially did not turn into a recession. Chris Haverland, global equity strategist at Wells Fargo Investment Institute, notes, “There are enough similarities that the 1995 cycle could serve as a potential roadmap for corporate earnings and equity prices in the upcoming quarters.”
Investors would welcome a repeat of that period. Following the first rate cut, earnings for S&P 500 companies rose by 12% over the next year. The S&P 500 itself surged by over 40% in the following 18 months, though mid- and small-cap stocks didn’t experience as significant a rise.
The sectoral performance was varied, as illustrated by historical data. Financials led the charge, and Haverland suggests that this performance could be replicated in the current cycle, especially as the sector has recently been upgraded. Interestingly, the information technology sector outperformed leading up to the first rate cut but then consolidated over the next six to 12 months before reasserting itself as a leader. Haverland notes, “If the sector follows a similar trajectory during the upcoming easing cycle, we’ll seek opportunities to upgrade, even given expectations for above-market growth.”
However, there are differences between now and 1995. The current monetary policy cycle has witnessed a much higher peak in inflation, and the Fed has maintained peak rates for an extended period. “Despite this, we believe the U.S. economy will avoid a recession and gradually strengthen through 2025. This, along with easier financial conditions, should support continued corporate earnings growth, equity market strength, and our preference for high-quality U.S. large-cap equities,” Haverland adds.
In the market, U.S. stock index futures fluctuated between small gains and losses following July’s consumer price data, which met expectations precisely. The yield on the 10-year Treasury inched up by 1 basis point.
As we analyze key asset performances, the S&P 500 currently stands at 5434.43, showing a 3.71% gain over the last five days, a 4.11% decline over the past month, and a 13.93% year-to-date increase. The Nasdaq Composite is at 17,187.61, with a 5.01% gain over the last five days but a 7.14% drop in the past month, and a 14.50% rise year-to-date. The 10-year Treasury yield is at 3.851%, showing a significant decrease over various periods. Gold has risen by 3.70% in the last five days and 21.29% year-to-date, while oil stands at 78.61, with a 4.19% increase in the last five days but a slight year-to-date decline.
Michael Gayed, fund manager and author of the Lead-Lag Report, highlights the utilities sector’s performance relative to the broader S&P 500. “Despite last week’s modest return to normal conditions, utilities remain one of the strongest indicators that risk-off conditions are still prevalent. Volatility remains a threat, and it would be premature to assume that last week’s rally signifies the end of the correction,” he writes.
