Even though some parts of the stock market — like certain software companies — have faced pressure recently, the bigger picture remains encouraging. The broader equity market has held up well, hinting that the economic backdrop still supports risk-taking and steady growth.
Historically, stocks tend to do best when the economy is expanding. They’ve done even better when that growth happens alongside falling interest rates. Looking at data stretching back to the mid-1900s, the strongest results occurred when those two forces aligned: during periods of economic growth and rate cuts, the S&P 500 returned about 12% per year, U.S. 10-year bonds gained around 10% annually, while 60/40 “Balanced” Portfolios delivered almost 11.5% returns.
RBC GAM’s “Monetary Policy and Economic Regime Matrix” illustrates this pattern clearly. It shows how stocks, bonds, and balanced 60/40 portfolios performed when the economy was either growing or contracting, and when central banks were either easing or tightening policy.
The worst combination for investors — a shrinking economy paired with rising interest rates — was also the rarest, happening only 0.2% of the time. The other two “in-between” conditions (growth with higher rates, or recession with falling rates) produced mixed results across stocks and bonds, but balanced portfolios still delivered mid-single-digit returns. In short, diversification continued to help even in less-than-ideal environments.
Looking ahead, with rate cuts now underway, investors can take cues from past cycles. RBC’s research maps out 12 previous monetary easing periods since the 1970s, showing how 60/40 portfolios performed after the first cut. Historically, returns have been strongest when the economy avoided recession — and that seems to mirror what we’re experiencing today.
So far, the current cycle is tracking close to the median of those past examples, suggesting there’s room for more upside. If economic growth continues and rates keep easing, conditions could remain particularly favourable for both stock and bond investors in the months ahead.
