When rates start to drop, it’s like the stock market gets a shot of adrenaline. Historically, the stock market has tended to perform well during periods of rate cuts. On average, in the six months following a rate cut, the has seen gains of around 8-10%.
This isn’t too surprising, as lower rates generally make borrowing cheaper, which can spur business investments and consumer spending. This ultimately boosts corporate profits and, by extension, stock prices. Plus, with lower returns on bonds, investors often turn to stocks for better yields, driving prices up even further.
But it’s not always a straight line up. The market can sometimes experience volatility in the short term as investors digest the reasons behind the rate cuts, like economic slowdowns or financial uncertainty. However, over the longer term, rate cuts have often been a signal of good things to come for equities.
For example, during the rate-cutting cycles in the early 2000s and again after the 2008 financial crisis, the market eventually rallied as the economy regained its footing. So, while the immediate aftermath of a rate cut can be a bit of a rollercoaster, history suggests that patient investors may be rewarded with solid returns as the dust settles. Aritzia could fare well ( ) on the TSX stands to gain significantly from continued rate cuts, and this is a story that begins with consumer behaviour.
When interest rates drop, borrowing becomes cheaper, which often leads to increased consumer spendin.