💰5 Charts to Know the Historical Fed Rate Cuts Impact & Strategic Insights
On September 18th, the Federal Reserve is expected to usher in a new round of interest rate cuts, with the U.S. stock market in September enveloped in an environment of high volatility expectations.
According to data from Trading Economics, the U.S. federal funds rate is projected to be around 4.75% in 2024 and around 3.75% in 2025.
The vast majority of economists surveyed by Reuters indicated that the Federal Reserve will cut interest rates by 25 basis points at each of the three remaining meetings in 2024.
The impact of interest rate cuts on the entire financial market will be multifaceted, see the figure below:
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The effects of interest rate cuts are widespread, including:
Reduced financial borrowing costs, making it easier for individuals and businesses to obtain loans at lower costs, but bank and financial institution lending rates may decrease.
Changes in bond prices and yields: newly issued bonds will have lower interest rates, making existing bonds more attractive and potentially increasing their prices.
Currency value fluctuations: if a country's interest rates fall, its currency may depreciate relative to other countries' currencies, affecting the cost of exports and imports.
Stock market volatility: after rate cuts, companies can finance at lower costs, which may raise profit expectations and potentially boost the stock market. However, if the market has already anticipated the rate cut, the actual market reaction may be limited.
Commodity demand: lower interest rates can increase demand for commodities as investors seek alternative investments, potentially raising prices for oil, metals, and other commodities.
Inflation risk: there may be an increased risk of inflation, as more money in circulation could drive up the prices of goods and services.
For investors, anticipating asset price fluctuations is even more crucial. $S&P 500(.SPX)$ $NASDAQ(.IXIC)$ and $DJIA(.DJI)$.
In this article, we have compiled five charts to help you dissect the context of each interest rate hike, the goals of macroeconomic regulation, the impact on global markets, and some industries and individual stocks that may potentially benefit.
Chart 1: Fed Historical Interest Rate Cuts and Corresponding Background Objectives
Since 1990, the Federal Reserve has undergone six complete cycles of interest rate cuts, starting in 1990, 1989, 1995, 1998, 2001, 2007, and 2019, respectively. The duration and number of rate cuts varied in each cycle, with most aimed at addressing or reducing the impact of economic recessions, stabilizing financial markets, and stimulating the economy by increasing liquidity.
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The context and purpose of each interest rate cut are closely related to the economic conditions and expectations at the time. Generally, the Federal Reserve's interest rate cuts are also accompanied by the use of other monetary policy tools, such as quantitative easing (QE) and forward guidance, to promote economic growth and stabilize financial markets.
Chart 2: The Impact of Historical 6 Interest Rate Cut Cycles on the Global Stock Market
In the following text, Charts 2 and 3 respectively reflect the fluctuating impact of the past six interest rate cut cycles on global capital markets and corresponding asset classes.
From Chart 2, we can see that in the past six interest rate cut cycles, the number of declines in the stock markets of developed countries has been greater than the performance of emerging market stock markets. The overall performance of the interest rate cut cycles is that the ratio of gains to losses is close to 50%.
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Chart 3: Performance of the US Dollar, Bond Market, Gold, and Other Commodity Prices During Interest Rate Cut Cycles
In Chart 3, we observe a significant decline in the $USD Index(USDindex.FOREX)$ against other global currencies; a noticeable increase in global bond market prices, with ETFs such as TMF, TLT potentially continuing to benefit from the interest rate cut environment; the gold market ($GCMAIN) has a higher probability of rising than falling; other commodity prices show a more pronounced decline during interest rate cut cycles.
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Upon closer examination of the U.S. stock market, interest rate cuts are used to stimulate the economy during recessions or slowdowns, which also benefits the stock market.
Chart 4: Market Performance of the S&P 500 Index 6 Months, 1 Year, and 2 Years After the Start of an Interest Rate Cut Cycle
Referring to the data in Chart 4, we observe that, generally speaking, the S&P 500 Index tends to rise after interest rate cuts, with pessimistic performances only within 2 years following the internet bubble in 2001 and the global financial crisis after 2007.
Assuming no major black swan events occur in 2024 or 2025, it is highly likely that we can expect the U.S. stock market to rise. Doesn't that make you want to join the ranks of index investing?
Next, let's take a closer look at which industries are likely to benefit from interest rate cuts.
Chart 5: Specific Industries Benefiting from the Federal Reserve's Interest Rate Cuts
Considering the decline in interest rates due to rate cuts, the reduction in market borrowing costs, changes in currency exchange rates, fluctuations in corporate earnings, and shifts in financial market liquidity preferences, we have collected and organized some industry stocks that are expected to benefit from the rate cuts based on public market information.
The following list is for discussion and reference only and should not be considered as direct investment advice.
We also welcome Tigers to add industries and companies you are optimistic about in the comments section.
Real Estate Industry: $D.R. Horton(DHI)$ , $SPDR Dow Jones Global Real Estate ETF(RWO)$ ;
Automotive Industry: $Tesla Motors(TSLA)$ , $Global X Autonomous & Electric Vehicles ETF(DRIV)$;
Retail Industry: $Amazon.com(AMZN)$ , $SPDR S&P Retail ETF(XRT)$ ;
Manufacturing Industry: $Boeing(BA)$ , $iShares U.S. Industrials ETF(IYJ)$ ;
Banking Industry: $JPMorgan Chase(JPM)$ , $Financial Select Sector SPDR Fund(XLF)$ ;
Infrastructure and Construction Industry: $Caterpillar(CAT)$ , $iShares U.S. Infrastructure ETF(IFRA)$ ;
Consumer Credit Industry: $American Express(AXP)$ , $Invesco Dynamic Credit Opportunities Fund(VTA)$ ;
Stock Market: $Berkshire Hathaway(BRK.B)$ , $SPDR S&P 500 ETF Trust(SPY)$ ;
Technology Industry: $Apple(AAPL)$, $Financial Select Sector SPDR Fund(XLF)$;
Export-Oriented Industry: $Nike(NKE)$, $iShares MSCI EAFE ETF(EFA)$ ;
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In summary:
The above is a historical background and data compilation related to interest rate cuts.
The industries and individual stocks mentioned are for discussion and reference only and do not constitute direct investment advice. We encourage you to conduct thorough research before making investment decisions.
For more industries and opportunities of interest, we welcome our Tigers to communicate more in the comments section.
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
good for reits as most of them (if not all) are trending up...
@HelenJanet @Shyon @Aqa @SPACE ROCKET @TigerGPT @GoodLife99 @Universe宇宙 @rL @koolgal @LMSunshine
For more industries and opportunities of interest, we welcome our Tigers to communicate more in the comments section.
High volatility expectations suggest that investors are anticipating significant price swings, which could be due to uncertainty around the Fed's decision, upcoming economic reports, or geopolitical events.