With & # 39; the world's two most important and closely monitored central banks – the European Central Bank (ECB) and the US Federal Reserve – now talking fairly frankly about reducing interest rates, regional and global markets have been anticipating. Even the most benign comment from Fed officials tends to make headlines and often drives markets higher or lower immediately afterwards.
General knowledge has long ago said that interest rate cuts are good for equities. But is that really true? Does a Fed interest rate cut have a positive effect on the markets after a period of rising interest rates? A glance at the market performance of the past 30 years, around the time of an interest rate cut, tells us three things:
Fed Rate Cut Results: 1989-2007
1. From 1989 to 2007, each individual cut in interest rates was preceded by strong stock market performance as soon as the upcoming event was wired by the Fed. The average achieved is 3.5%, before the actual cut. That is almost five times higher than the average monthly performance of the benchmark, which is 0.74%.
This of course reflects the fact that an interest rate cut is no surprise. The Fed does not want to create volatility through surprising markets, so it telegraphs lower interest rates long before the austerity actually takes place. Indeed, a month before the Fed meeting is the right time to advertise the move, as market performance shows, investors clearly get the hints and price in the cut long before this happens.
We are now experiencing the same & # 39; n configuration. Last week, Powell said the Fed "will act properly," and that alert prices are likely to be lower. At present, according to the consensus, there is a 69% chance that the Fed will get 20% more during the July meeting than last month.
Although the schedule is scheduled for June 19, it is considered too early for the interest rate decision, especially since the Fed has not had time to properly communicate the event as it preferred. Yet the market story says that after decades, since December 16, 2008, we are approaching the first Fed interest rate cut.
2. An interest rate cut helps stabilize falling markets in the short term. In 1998, 2001 and 2007, the performance of S & P 500 during the previous three months that led to the interest rate cut was negative. With a hint on a cut and a delivery, the months around the cut were positive for the index, and the event also helped calm than turbulent markets.
3. However, spending cuts are not a magic cure for a troubling economy. As the performance of the market shows three months after and even one year later, lower rates did not necessarily have to captivate stocks in the longer term. In 2001 and 2007, lower rates could not prevent subsequent market incidents. It is impossible to say whether the cut lines have limited the slides, but it clearly did not prevent them. Over the longer term, interest rate cuts do not guarantee strong performance on the stock markets.
Fed Rates 1987-2019
The chance of a Fed rate cut in July is increasing. The market has already started pricing. Additional hints ensure a strong performance window in July.
Nevertheless, caution is always required. The exceptionally low interest rates that we have seen over the past decade have brought us to unknown territory with little historical macro perspective as a guide.
