Wells Fargo strategist says investors may face 1995 rerun once Fed cuts rates

It was the summer of 1995. NASA’s space endurance record was broken, at a laughable 84 days compared to the two astronauts now who, DON’T CALL THEM STRANDED, may be in weightlessness for eight months. Johnnie Cochran was saying something poetic about gloves fitting, and the movie Waterworld was, um, drowning at the box office.

That was also a period when the Federal Reserve, then led by Alan Greenspan, embarked on an interest rate-cut cycle that may have parallels to what the markets are expecting for September.

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The 1995 cycle coincided with disinflation and an economic soft landing that, importantly, did not morph into a recession. “There are enough similarities that the [1995 cycle] could provide a potential roadmap for corporate earnings and equity prices in the coming quarters,” said Chris Haverland, global equity strategist at the Wells Fargo Investment Institute.

Investors would happily sign off to what happened. Earnings for the S&P 500 index companies rose by 12% in the year following the first rate cut. The S&P 500 soared more than 40% in the 18 months after, though mid- and small-caps didn’t rise by as much.

The sector mix was split, as this chart shows. Financials led the way, and Haverland says that performance could repeat itself now, as it recently upgraded the sector. Interestingly, the information technology sector outperformed leading into the first rate cut but then consolidated over the next six to 12 months, before reasserting itself as a leader. “If the sector takes a similar path during the upcoming easing cycle, we will look for opportunities to upgrade even given expectations for above-market growth,” he adds.

Granted, the current monetary policy cycle saw a much higher peak in inflation, and the Fed has held rates at peak levels for much longer. “Even so, we think 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 favorability toward high-quality companies within U.S. large-cap equities,” he said.

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The market

U.S. stock index futures ES00 NQ00 veered between small gains and losses following July’s consumer price data that met expectations exactly. The yield on the 10-year Treasury BX:TMUBMUSD10Y rose 1 basis point.

The buzz

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The chart

Michael Gayed, the fund manager and newsletter author of the Lead-Lag report, points to this chart of the utilities sector XLU relative to the broader S&P 500 SPX. “Despite last week’s modest return to normal conditions, utilities are still one of the strongest signals that risk-off conditions are still in control. In the near-term, volatility is still a threat and it shouldn’t be assumed that the rally that finished last week means the correction is now a thing of the past,” he writes.

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Source: finance.yahoo.com