How will the market behave after the Fed rate cut? Let's take a look at the history of nearly 100 years

The Fed seems to be preparing for a rate cut in September. A century of rate cut history shows that this is good news for the stock market as long as the economy remains strong.

The Fed continued to keep rates steady on Thursday, not cutting rates this month but hinting at a possible rate cut at the September meeting.

This is in line with market expectations, as futures data shows that the market unanimously believes that the Fed will cut the federal funds rate by at least 25 basis points from the current range of 5.25% to 5.5% next month. Despite Wall Street's previous incorrect predictions, traders estimate that there is an 80% chance of a rate cut by the end of the year.

The S&P 500 index fell 1.4% on Thursday. The yield on the 10-year US Treasury bond fell below 4%, hitting its lowest level since February.

Investors are betting that the widely expected rate cut later this year will drive the stock market higher, with history on their side. However, there are also reasons for caution: the future performance of the US stock market largely depends on what happens next in the economy. In addition, investors need to face the fact that any upcoming rate cuts may already be priced into the market.

So what should investors expect next? In order to predict the market's reaction to the upcoming rate cut, Hartford Funds recently studied the performance of US stocks and other assets in the 12 months following 22 rate cut cycles starting from 1929.

For stocks, the results vary greatly, from an 82% increase in 1933 to a 45% decrease in 1973. However, on average, the market rose by 11%, a figure roughly in line with the historical overall return of the S&P 500 index.

In years when the Fed's actions helped the economy successfully withstand a recession, such as after the 1998 Asian financial crisis, the performance of US stocks was much better, with an average return of 17%.

During recessions, US stocks still rose on average, but by a much smaller margin, only 8%.

This average 8% increase also masks some significant losses: after the 2007 financial crisis, the 2000 dot-com bubble, and the two rounds of rate cuts in 1981, stocks experienced double-digit declines, when Fed Chairman Volcker was working to address the last major inflation in US history.

This time, investors seem to be able to count on a strong economy and the Fed achieving a so-called "soft landing". While the labor market has softened somewhat, the unemployment rate remains at historic lows. Corporate profits in the second quarter were broadly in line with expectations. A recent survey of economists in the corporate and academic sectors by foreign media shows that they expect only a 28% chance of a recession in the US in the next 12 months, down from over 50% last year.

However, one factor bullish investors need to watch out for is that historically most Fed rate cuts have occurred during periods of sharp stock price declines to address unexpected economic emergencies. This time, with a strong economy, a rate cut is far from unexpected Therefore, small-cap stocks, which are most sensitive to interest rate changes, have been rising. The Russell 2000 Index has risen by more than 10% in the past month. Due to this increase, the Fed's rate cut in September is likely to feel lackluster.

If the Fed does cut rates and the economy remains strong, history shows that investors should expect further gains in the stock market, but the increase may be smaller than in the past.