Does the Market Rally When the Fed Begins to Cut Rates?

4. Aug. 2024

The relationship between rate cuts and the stock market, as illustrated in the provided graph, shows that major market declines often occur after the Federal Reserve pivots to lower interest rates. This pattern is evident in historical instances where the Fed's rate cuts were followed by significant drops in the S&P 500. Several factors contribute to this phenomenon, which are crucial for investors to understand.

Economic Weakness:

• Rate cuts typically respond to economic slowdown or anticipated recession.
  
• Each instance of the Fed pivoting to lower rates (1969, 1973, 1981, 2000, 2007, 2019) corresponds to significant market declines soon after.
  
• Rate cuts signal concerns about economic health, causing investors to lose confidence, as reflected in the graph.
  

Delayed Impact:

• Rate cuts do not immediately stimulate the economy; it takes time for their effects to propagate.
  
• The graph shows that the majority of the market decline occurs after the Fed's pivot, indicating that initial rate cuts were insufficient to halt the downturn.
  
• During this lag period, the market may continue to decline as economic data reflects ongoing weakness.
  

Investor Sentiment:

• Rate cuts can trigger fear among investors, who interpret the move as an indication of severe economic issues.
  
• The graph shows substantial percentage drops in the S&P 500 following each pivot, demonstrating how negative sentiment can exacerbate declines.
  
• The fear of a worsening economy leads to a sell-off in stocks, contributing to further market drops.
  

Credit Conditions:

• During economic stress, banks may tighten lending standards, reducing the effectiveness of rate cuts.
  
• Post-rate cut periods in the graph align with times of economic stress, where credit conditions likely tightened.
  
• Businesses and consumers may not be able to take advantage of lower borrowing costs, limiting economic recovery and impacting the market negatively.
  

Historical examples such as the crises in 2000 and 2007 highlight substantial market drops after rate cuts, as seen in the graph. In both cases, the rate cuts responded to bursting bubbles (tech bubble in 2000, housing bubble in 2007), and the economic fallout was too severe for rate cuts to provide immediate relief. The graph underscores that while rate cuts aim to stimulate the economy, they often follow significant economic downturns. Investors should be cautious, recognizing that initial market reactions to rate cuts can be negative due to perceived economic weakness, delayed policy impact, and deteriorating sentiment.

5. Aug. 2024

Anmerkung

We are also expecting the housing situation to resolve soon. As the rates are dropping, many new home buyers are going to bailout and increase the supply. Institutions would also have to release their properties to deal with the incoming recession. The false narrative that many realtors are spreading these days is not pan out.
But the good news is, most millennials are soon going to be homeowners with low rates and affordable pricing!