At long last, the wait is over.
After months of anticipation, the Federal Reserve has started a new rate-cut cycle. The central bank slashed rates by 50 basis points on September 18.
Stocks rose on the news. But not everyone is happy. Some financial commentators have pointed out that when rate cuts begin near market highs, it often doesn't bode well for the market...
However, if we take a closer look, the picture is better than it seems.
The macroeconomic conditions still say this is a good time to be in the market. And despite the fears in the media, so does the history of rate cuts...
The stock market has been near all-time highs. That makes some analysts nervous.
Typically, the Fed cuts rates when it's worried about the economy. When you combine new highs with shaky economic footing, it might seem like the stock market is ready to fall.
Take a look at this table from MarketWatch. It shows how stocks have performed six months after the Fed cuts rates at new all-time highs ("ATH") since 1990. At first glance, you might think it's time to take some chips off the table...
On average, it might look like the market goes down after times like this. But the truth is more complicated.
First, the last two data points start in September and October 2019, respectively. The problem is, these data sets overlap by five months. That skews the results, putting more weight on what should be a single period.
Second, I'd argue that six months is too short a window. It takes a long time for monetary policy to play out. We need to look further out to see what Fed rate cuts do to market performance.
Finally, this table is missing important context...
If you look closely, you'll notice that the three down periods line up with some major macroeconomic and geopolitical events.
One was Iraq's invasion of Kuwait in August 1990. Another was the pandemic-induced market panic in March and April 2020... which happened almost exactly six months after the 2019 rate cuts.
These events sent markets into chaos. But they had nothing to do with the Fed.
I reworked the table with all this in mind. When we fix the overlapping periods and push the time frame to one year, it gives us a clearer picture. And the outlook is a lot more optimistic. Take a look...
After rate cuts near new highs, historically, the market has risen every single time over the following year... with an average gain of 13.2% to boot.
We shouldn't worry that rate cuts will lead to losses. In fact, we should expect higher stock prices from here.
As for trouble in the economy, the broader macroeconomic environment is stable today...
The U.S. unemployment rate of 4.2% has ticked up from last year's low of 3.4%. But as I covered recently in DailyWealth, that increase is mainly due to a larger labor force. And the rate remains low by historical standards.
Without widespread layoffs, consumers are in good shape... especially as inflation falls. Personal consumption expenditures – the Fed's preferred inflation gauge – has been trending toward the 2% target.
Plus, as interest rates come down, so will mortgage rates and borrowing costs. That's great news for consumer spending, which makes up roughly 68% of gross domestic product ("GDP").
We're already seeing signs of strength here, too. Consumer spending helped grow GDP overall by 3% in the second quarter. That was more than double the rate of the first quarter.
In short, we shouldn't believe the most common fears about rate cuts...
Today's macroeconomic environment is favorable to investors... And historical data shows that markets should perform well over the next year.
The Fed's biggest challenge from here will be balancing the risks of unemployment and inflation without triggering a recession. As long as the Fed can keep that balance, now is as good a time as ever to be bullish on stocks.
Good investing,
Andrew McGuirk
Further Reading
"If you're worried about a recession happening soon, don't be too quick to panic," Vic Lederman writes. We're seeing other signs of economic strength. For instance, one indicator in the shipping industry is showing that the global economy is healthier than some might think... Read more here.
Fear and speculation are just as common in the markets as they are in humanity in general. But in the market, volatility is normal. And if the volatility of the past few months has spooked you out of the market, you could be making a big mistake... Learn more here.
HIGHS AND LOWS
NEW HIGHS OF NOTE LAST WEEK
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RenaissanceRe (RNR)... insurance
Ameriprise Financial (AMP)... financial planning
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JD.com (JD)... "China's Amazon"
Alibaba (BABA)... Chinese e-commerce
Tanger (SKT)... retail REIT
Hasbro (HAS)... toys
McDonald's (MCD)... burgers and fries
Scotts Miracle-Gro (SMG)... plant food and cannabis
Live Nation Entertainment (LYV)... live events
United Airlines (UAL)... air travel
Hilton Worldwide (HLT)... hotels
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Lowe's (LOW)... home improvement
Stanley Black & Decker (SWK)... tools and storage
Dover (DOV)... manufacturing
Johnson Controls (JCI)... HVAC and security
Koninklijke Philips (PHG)... medical technology
Linde (LIN)... chemicals
Air Products and Chemicals (APD)... chemicals
Osisko Gold Royalties (OR)... junior gold miner
NEW LOWS OF NOTE LAST WEEK
Not many... It's a bull market, you know!
