I looked back at all the times the OCR has reached a peak in the past 25 years, and what happened after that first cut.
There have been five easing cycles since the turn of the century – starting in 2001, 2003, 2008, 2011 and 2015.
I haven’t forgotten about the Covid-era, but at that point an easing cycle was already under way.
The OCR peaked at 3.50% in 2014 and 2015, and it had fallen steadily to 1% by the time lockdowns ensured a recession in 2020.
Interest rates obviously fell further from then on, but it wasn’t the beginning of a decline from a recent peak.
Anyway, in the six months following the first OCR cut in those five examples, sharemarket returns were mixed.
Things become clearer if you look beyond that initial dust-settling period, and over 12 months the market was up on four out of five occasions, with an average return of 12.2%.
In the 24 months following an OCR cut, the market was also up four out of five times, and the average return was almost 25%.
Those returns are healthy and a hit rate of 80% is solid, with the exception being the easing cycle that started in July 2008.
That was during the GFC, when the economy was already in recession and any rate cut optimism was drowned out by an extremely difficult period for businesses and households.
It’s not dissimilar when looking at the history of easing cycles in the US.
Since 1980, there have been 10 times when the Federal Reserve has started cutting rates from a peak.
The S&P 500 was up seven out of 10 times in the next 12 months, for an average gain of 7.8%, and eight times in the two years afterwards, for an average return of 24.1%.
The only easing cycles that weren’t accompanied by positive returns were the ones that started in 1981, 2001 and 2007.
As was the case in New Zealand, those three examples were all around the time of recessions.
The case is clearer for bonds and fixed income.
In every easing cycle since the OCR came into being in 1999, the NZX Government Bond Index has delivered positive returns in the six, 12 and 24 months following that first cut.
That shouldn’t come as a surprise. Bonds and fixed income do well when interest rates are falling, even if there’s a recession.
In fact, the one easing cycle which saw local shares perform poorly (during the GFC) was the strongest period for bonds.
Investors benefit from the stable and predictable income they receive, while they can also see capital growth as existing vintages of bonds (issued when interest rates were higher) are repriced higher.
Reserve Bank Governor Adrian Orr during his OCR press conference. Photo / Mark Mitchell
Now that the easing cycle is under way, last week’s OCR cut will be the first of many as we head toward the neutral level of 3%, give or take.
We’re likely to see the US Federal Reserve’s first downward move next month too, with markets of the view that a quarter-point cut in September is a done deal.
This should make for a much more attractive backdrop for investors, with most assets typically performing well in the wake of rate cuts.
Nothing is a sure thing when it comes to investing, although history would suggest bonds and fixed income are very well-positioned over the next year or two.
When it comes to shares (and the same goes for property), the odds are good as well.
However, whether we see the usual strong gains that follow rate cuts might hinge on how economic growth develops from here.
Mark Lister is investment director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision Craigs Investment Partners recommends you contact an investment adviser.
