Small-, Mid-Cap Funds Beat Large Cap After Third Rate Cuts, S&P Finds

The dates of the third rate cuts are: November 1990, January 1996, and January 1998. The Federal Reserve instituted a rate cut earlier this week for the third time this year.

“There’s a widely accepted axiom in the investing world that the third time is the charm for rate cuts,” says Rosanne Pane, research director of Fund Services at Standard & Poor’s. “One might expect that if the economy was in need of three successive rate cuts, there would be a ‘flight to quality.’ In that case, large cap funds, and even bond funds, would outperform other sectors. Our research indicates that this didn’t happen in the bull market of the 1990’s. We found that small caps did the best of all fund categories, followed by mid cap funds.

“Large cap funds lagged behind in each of the three periods we considered,” Pane said, add that “this is probably a reflection of the bull market mentality that growth will drive profits and increase equity prices.”

Todd Rosenbluth, ratings analyst, commented that “Domestic bond funds did really quite well in the period following the third rate cut in 1990, because the Fed took a total of 15 steps to cut rates by 4% and get the economy out of recession. In the year following the January 1996 third rate cut, high yield bond funds were up 12%, while investment bond funds only returned 3.7%. Neither bond sector performed well after the third rate cut in January 1998.”

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