To The Moon

What happens to the stock market after the Federal Reserve begins cutting interest rates?

The unhelpful answer is - it depends.

“Expert” Opinion.

According to SentimenTrader, Senior research analyst, Jason Goepfert:

• Opinions aside, the imminent cut in the fed-funds rate has been a crapshoot for investors.

• There was no consistent pattern in forward returns after significant hiking cycles, in the past.

• Suggesting that past trends might not be a reliable indicator of future performance.

• As for interest cut, the most recent 3 interest cuts had led to a “big” drop in stock prices. (see below)

• Just so we are clear, before the interest cut, there wasn't a clear pattern.

• Also pointed out that the stock market's performance after the first interest rate cut did not seem to depend on how high or low the stock market was at the time.

Other Elements.

Investors and analysts alike have emphasized that context matters when it comes to market performance & rate cuts.

An easing cycle can be a positive backdrop for stocks and other assets perceived as risky if rate cuts are seen blunting or heading off an economic downturn (aka recession).

However, when a central bank lowers interest rates “too late” (behind the curve), after the economy has already started to weaken, investors can get rattled.

Goepfert qualified that he isn’t trying to predict what would happen to US economy next.

It will be impossible to know for sure whether latest interest rate cut will lead to a recession, that could greatly affect how the stock market performs in the future.

Market Performance Post Cut.

Deferring to historical data, the impact of interest rate cuts on stocks (& its performances) is not always the same. (see above)

Goepfert have observed that in the past, stocks have either performed:

• Very well with low risk, or

• Very poorly with high risk.

• And there has been no in-between (middle ground) always.

Looking at above table, a decent rule of thumb is to watch the next two weeks after a cut.

• If risk exceeded reward, then it was a strong suggestion that the following year would be tough.

Others’ Opinions.

Given that Wednesday interest cut happened under the backdrop of a US market at an almost all time high (ATH), this begs the question of “does the interest cut provides (a) bulls additional fuel or (b) do they portend trouble ahead?

Dow Jones Market Data ran back the tape and found that since 1990, the Fed has cut rates 7 times while the $S&P 500(.SPX)$ was at or near (within 1%) of an all-time high (see below).

In those instances:

• Stocks tended to rise on decision day (not including Wednesday).

• Up 71.4% of the time with a median gain of 0.51%.

• 6 months later, the performance is mixed, rising 57.1% of the time with a tepid median gain of 0.62%.

To further affirmed above findings, analysts at $JPMorgan Chase(JPM)$ ran the data back 40 years.

Below is the analysis breakdown:

• The Fed has cut interest rates 12 times with the S&P 500, within 1% of an all-time high.

• The market was higher a year later, all 12 times with an average return of around +15%.

• But this does not always mean the stock market will continue to go up.

• It really depends on whether the Fed can stop a recession.

According to Rosenberg Research, President, David Rosenberg:

• Historically, only half of the bond rally happens before the Fed cuts interest rates.

• As for the Fed’s latest cut, the risk now is that many people are overconfident and believe that the normal ups and downs of the economy (business cycles) are no longer happening.

• They think that the economy will continue to grow without any problems.

My viewpoints: (mine only)

I was elated to find the 3 composite indexes’ rally on Thu, 19 Sep 2024. (see above)

• The $DJIA(.DJI)$ (^DJI) rose more than +1.2% to close above the 42,000 level for the first time.

• The S&P 500 (^GSPC) climbed roughly +1.7%.

• The tech-heavy $NASDAQ(.IXIC)$ led the gains, up roughly +2.5%. Best performer of the day.

Upon regaining composure, the ringing question of how long the “good” times will last begin bother me.

And I took the time to research on this ïnteresting” topic.

It is hoped that by the time you read until here, you have the answer.

• To me it will last as long as US economy remains recession-free.

• To have that confidence / knowledge, boils down to continual effort to keep abreast with the things happening in the US.

This means, following up on the followings:

• US weekly jobless claims - Thu, 19 Sep 2024.

• US Consumer confidence report - Tue, 24 Sep 2024.

• New home sales report - Wed, 25 Sep 2024.*

• US Gross domestic product (GPD) Q2 2024 2nd revision - Thu, 26 Sep 2024.*

• Personal consumption expenditure (PCE) for August 2024 - Fri, 27 Sep 2024.*

• Consumer sentiments report (final) - Fri, 27 Sep 2024.

* = very important

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If you think it is a lot of work, it is ! When it comes to your hard-earned monies, the effort put in to grow it, is worth the while - right !

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