Soft landing talk sparks '90s flashbacks

If the US does dodge a recession, investors would want to start looking more at 'midcycle' stocks

- Aaron Back

Talk of a soft landing for the U.S. economy has investors dreaming of a 1990s-style boom soon afterward. A lot would have to go right for that to happen, but it isn't as outlandish as it sounds.

Examples of the economy escaping a tightening cycle from the Federal Reserve without entering a recession are few. Some cite the Fed's rate cuts in 2019, though it is impossible to know how that would have ended without the pandemic. The most frequently mentioned example is a series of rate hikes in 1994. They wreaked havoc on markets that year, but were soon followed by the dawn of a golden period for both Wall Street and Main Street.

The effective federal funds rate rose from around 3% at the start of 1994 to around 6% in March 1995, according to data from the St. Louis Federal Reserve a three percentage point move in a little over a year. That looks similar to, though certainly less severe than, the Fed's tightening from March 2022 through August 2023, which brought the target range on the federal funds rate from 0% to 0.25% to its current range of 5.25% to 5.5%.

The economy of the mid1990s slowed in response but stayed well clear of contraction, with real gross domestic product out at a 2.2% growth bottoming year-over-year pace in the fourth quarter of 1995, Fed data show. The Fed made some modest rate cuts in 1995, similar to what economists now expect for 2024. What followed is known to anyone on Wall Street: one of American history's great booms. The S&P 500 declined 1.5% in 1994, then rallied 34.1% in 1995 and didn't suffer another down year until the dot-com bubble burst in 2000.