J.P. Morgan outlines how 12 asset classes perform depending on why the Fed cuts rates

J.P. Morgan Asset Management this week looked at how 12 asset classes performed 12 months after the Federal Reserve begins a rate-cutting cycle, depending upon the economic setting policymakers are dealing with when making such reductions.

Among its findings, J.P. Morgan’s asset management division said risk assets such as large-cap stocks and high-yield bonds have performed well when rate cutting cycles have coincided with a soft economic landing. It examined where investors should consider allocating capital after Fed Chair Jerome Powell last week said rate cuts were on the way because of declining inflation risks and rising labor-market risks.

J.P. Morgan’s assessment included grouping asset-classes performances under “soft landing” and “hard landing” scenarios. “Critically, large-cap stocks have performed almost twice as well as small-caps, suggesting investors should focus on quality under either economic scenario,” Gabriela Santos, global market strategist, and Mary Park Durham, research analyst, at J.P. Morgan Asset Management, said in their note.

When rate cuts coincide with recessions, history shows risk assets have suffered. “Within equities, international equities have suffered the most, followed by the Value style and small-caps,” they said. “Investors may want to correct portfolio imbalances that may have developed since the last rate cutting cycle. This is especially true and time-sensitive for core fixed income,” Santos and Durham said.

From 1984 through present, here are the average returns 12 months after the Fed makes a first cut, based monthly:

• U.S. Growth equities – Soft-landing returns: +20.4%. Hard-landing returns: -0.3%.
• U.S. large-cap equities – Soft-landing returns: +18.1%. Hard-landing returns: -4.6%.
• International equities – Soft-landing returns: +16.3%. Hard-landing returns: -14.3%.
• U.S. Value equities – Soft-landing returns: +15.1%. Hard-landing returns: -10.2%.
• U.S. small-cap equities – Soft-landing returns: +12.0%. Hard-landing returns: -6.4%.
• Commodities – Soft-landing returns: +9.3%. Hard-landing returns: -13.2%.
• U.S. core bonds – Soft-landing returns: +8.2%. Hard-landing returns: +7.3%.
• 2-year Treasuries (US2Y) – Soft-landing returns: +7.4%. Hard-landing returns: +6.3%.
• 10-year Treasuries (US10Y) – Soft-landing returns: +6.2%. Hard-landing returns: +8.8%.
• U.S. high-yield bonds – Soft-landing returns: +5.8%. Hard-landing returns: -2.8%.
• Cash – Soft-landing returns: +5.0%. Hard-landing returns: +2.5%.
• U.S. Dollar – Soft-landing returns: +3.9%. Hard-landing returns: -1.2%.