As the Federal Reserve is about to cut interest rates for the first time in four years, traders are reviewing the situation when Alan Greenspan led the Fed to achieve a rare soft landing in 1995 in order to formulate current trading strategies.

Similar to nearly thirty years ago, US bonds and stocks rose before the crucial Federal Reserve meeting. But this time, the core issue facing Fed Chairman Powell is: which approach - a 25 basis point cut or a 50 basis point cut - is most beneficial to the US economy.

According to Kristina Hooper, Chief Global Market Strategist at Invesco, as the Federal Reserve begins to ease policy ahead of the US election, the US economy seems likely to avoid a recession.

She said, "Once the Fed starts cutting rates, it will trigger a psychological reaction, which will be a bullish factor."

According to Bloomberg's analysis of six easing cycles by the Federal Reserve since 1989, the S&P 500 index, US bonds, and gold usually rise when the Federal Reserve begins to cut interest rates.

Data shows that in terms of stocks, the S&P 500 index averaged a 13% increase in the six months after the Fed started cutting interest rates, excluding the economic recessions in 2001 and 2007.

Meanwhile, during the Fed's easing cycles, the performance of short-term U.S. Treasury bonds usually outperforms long-term bonds, a phenomenon known as steepening yield curve. In the six months after the Fed's first interest rate cut, the spread between the yields of 10-year and 2-year U.S. Treasury bonds typically widens by an average of 44 basis points.

In addition, during the past six easing cycles of the Fed, gold has brought returns to investors four times. The U.S. dollar and oil have experienced alternating ups and downs.

Of course, traders are far from being able to determine the economic outlook for the next few months.

The Fed is set to start cutting interest rates before the confrontation between former President Trump and Vice President Harris in the November election. The economic agendas presented by the two presidential candidates are starkly different, but both have the potential to disrupt global markets based on the results of the congressional vote.

Salman Ahmed, Head of Global Macro and Strategic Asset Allocation at Fidelity International, said, "A soft landing is the most likely scenario. However, the election will be crucial, and this may be a unique cycle." He has downgraded his rating on U.S. stocks from shareholding to neutral, partly due to election risk.

Republican candidate Trump promised to impose high tariffs and extend tax cuts, which is seen as beneficial to the US dollar and detrimental to bonds. Goldman Sachs economists said that Trump's tariff policy, if implemented, could fuel inflation.

The former president promised to reduce the corporate tax rate from 21% to 15%, which would be bullish for corporate profits. In contrast, his Democratic opponent Harris proposed raising the tax rate to 28%, which, according to Goldman Sachs economists, would reduce corporate earnings by about 5%.

Will the script from 1995 be replayed?

In the past six easing cycles since 1989, the Federal Reserve has only managed to avoid an economic recession twice - in 1995 and 1998. The US stock and bond markets expect the Fed to achieve a soft landing similar to 1995 this time.

At that time, Greenspan and his colleagues lowered interest rates from 6% to 5.25% in just six months, saving the economy from recession. In the 12 months after the first rate cut, US Treasury yields increased, while the total return of bonds lagged behind cash.

This time, Federal Reserve officials have kept the target range for the benchmark interest rate at 5.25%-5.5% for the past 14 months, although policymakers have not guaranteed aggressive rate cuts.

Bond traders expect the Federal Reserve to ease more than 200 basis points in the next 12 months, with the S&P 500 index just a step away from its historical high and credit spreads close to historical lows.

What gives investors hope for a soft landing of the economy is the strong balance sheets of households and businesses. Corporate profits and household wealth are at historic highs, making them less vulnerable to economic shocks.

BMO Wealth Management's Chief Investment Officer, Yung-Yu Ma, said, 'The major issue facing the economy and the stock market is no longer inflation, but high interest rates. By cutting interest rates now, the Federal Reserve may address this issue and prevent an economic recession.'

This prepares traders for lower borrowing costs and a relatively flexible economy.

The latest stock flow data released by Bank of America and EPFR Global shows that funds are flowing into the utility and real estate sectors, both of which are closely related to the economy and have historically benefited from interest rate cuts as long as the economic growth is strong.

Tatiana Darie, a strategist at Bloomberg Markets Live, also pointed out that traditionally, US government bonds tend to rebound at the start of a loose monetary policy by the Federal Reserve, usually coinciding with a weak economy. However, in the case of a soft landing, bond performance often lags behind stocks.

Editor/Somer