Fed Rate Cut Began (2001) - What Happened?

This time, we will look into the changes in S&P500 and gold following the U.S. Federal Reserve's rate cuts in 2001. As I mentioned in the previous post, there was a unique event -the dot.com bubble burst - during this period, so I considered excluding it. However, excluding all negative cases like this would introduce a positive bias into the results. Moreover, one of the recent concerns among investors is the possibility of an AI bubble, so I decided to cover this topic.

First, let’s review the timing and magnitude of the U.S. Federal Reserve's rate cuts in 2001.

On January 3, 2001, the Fed started cutting rates from 6.5%, and by December 11, 2001, interest rates had been reduced significantly to 1.75%. This suggests that both the U.S. economy and the stock market were in pretty bad shape. After the last rate cut of 0.25% on December 11, 2001, there were two additional cuts on November 6, 2002, and June 15, 2003, totaling 0.75%. However, since there was a gap of more than 11 months between these cuts, I will consider the rate cut cycle that began on January 3, 2001, to have ended on December 11, 2001.

Now, let’s examine the changes in the S&P 500, the major U.S. large-cap stock index.

If we take one month before the first rate cut as the baseline, the stock price rose by about 1.8% one month after the first rate cut. However, by the time of the final rate cut at the end of the year, it had fallen by 14.2%, and continued to decline, reaching -23.5% six months later and -31.7% one year later.

Let’s take a brief look at peak and troughs of the major stock indices and two notable corporate bankruptcies during the dot.com bubble burst.

• S&P 500 peak (March 24, 2000): 1,527.46
• S&P 500 bottom (October 9, 2002): 776.76 (a 49.1% drop from the peak)
• NASDAQ peak (March 10, 2000): 5,048.62
• NASDAQ bottom (October 9, 2002): 1,114.11 (a 77.9% drop from the peak)
• Enron bankruptcy (December 2, 2001): The largest corporate bankruptcy in U.S. history at the time, with $63 billion in assets.
• WorldCom bankruptcy (July 21, 2002): Surpassing Enron, the largest corporate bankruptcy in U.S. history at the time, with $107 billion in assets.

How long did it take for the S&P 500 and NASDAQ to recover their previous peaks from the dot-com bubble? The S&P 500 took 13 years (reaching 1,569.19 on March 28, 2013), while the NASDAQ took 15 years (reaching 5,056.06 on April 23, 2015). It’s staggering. When you see data like this, it’s hard to take the advice of experts who say, "If you invest in strong indices like the S&P 500 or NASDAQ, which generally trend upward over the long term, and hold through the downturns, you can eventually achieve an average annual return of over 10%. So, avoid trying to time the market."

So, how did the price of gold change during this major market collapse?

Compared to the baseline (one month before the first rate cut), gold prices remained flat until the last rate cut, after which they began to rise. One month after the last rate cut, gold had risen 6.0%, six months later it was up 18.5%, and one year later it had increased by 19.7%. Compared to the plunged S&P 500, the relative return difference was 51.4 percentage points - quite remarkable. Long live gold.

With this, we wrap up our discussion on the U.S. Federal Reserve’s rate cut cycle in 2001. Next time, we’ll cover the 1995 rate cut cycle. Many stock market experts, who claim "this time is different" regarding the U.S. Federal Reserve’s anticipated rate cuts expected to start in two weeks, often cite 1995 as a comparable example. Let’s see how it turned out.

Thanks for reading. Wish you grow rich slowly and surely!

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