What effect might the projected rate cut in September have on stocks and bonds?
Friday, September 6, 2024
A vast majority of pros on Wall Street are expecting the Federal Reserve (actually, it’s the
Federal Open Market Committee or FOMC) to cut its bellwether interest rate by ¼ of 1% or ½ of 1% at their meeting on September 17th and 18th. This rate, known as the Fed Funds Rate, is currently 5.25% to 5.5%. It is the rate at which banks lend money to other banks on an overnight basis. While it’s a very short-term rate, it affects longer term rates throughout the economy.
Some investment professionals believe that this upcoming change of interest rate policy is a very bullish signal and will spur a fresh move up in the stock market. One reason for this bullish outlook is that lower interest rates may mean lower home mortgage rates, which will stimulate activity and growth in the housing industry. The housing industry plays a major role in our overall economy. Also, lower interest rates may push some investors out of money market and bond funds and into the stock market. History paints a less sanguine picture.
LPL’s chief market technician recently published a study of stock market performance following the first cut in the Fed Funds (interest) Rate. Based on the last nine major rate cutting cycles since the 1970s, the S&P 500 Index has generated mixed returns over the 12 months following the first cut. One third of the time, the stock market was down 14% to 20% for the year following. Yikes! That’s not good.
How the economy holds up, and if we enter or avoid a recession will ultimately dictate how stocks perform over the longer term.
The 12-month average return was a mediocre 5.5%. Furthermore, 12-month maximum drawdowns following the first cut have been around 19%–20%, larger declines than the average maximum drawdown for all years since 1974 of 14.4%. On a more positive note, the median 12-month return came in at an acceptable level of 10.8%. Of course, how the economy holds up, and if we enter or avoid a recession will ultimately dictate how stocks perform over the longer term. LPL’s Research Team believes that a soft landing is viable but not guaranteed for the US economy, but they emphasize that the recession risk is not off the table. They also see additional turbulence leading up to the November election. Overall, they expect volatile market conditions and maintains its neutral stance on equities.
My colleagues and I at Riverfront Capital Strategies are in solid agreement with this recommendation. We are focused on managing your asset allocation in light of your goals and risk tolerance.
Please reach out to us if you have any questions or concerns.
Bruce Robinson, CFP
Source: What Does a Rate Cut Mean for Stocks and Bonds – Adam Turnquist, Chief Technical Strategist of LPL Financial. Last updated August 29, 2024.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
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