What does the market do after rate cuts?
and other interesting tidbits
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Last week, we covered the Federal Reserve’s long-awaited interest rate cut and the implications for borrowing, which you can find here.
This week, we are diving into the influence of rate cuts on the stock market.
Is it good or bad?
Stock returns
Tough part of the schedule
How much longer
Consumer
R&D
Is it good or bad?
The Federal Reserve (Fed) can cut for good and bad reasons. Currently, they’re cutting to ensure the labor market doesn’t weaken. Given present knowledge, this would be a “good” cut versus a “bad” one. A “bad” one would be when the Fed cuts rates to try to save the economy from recession.
When the Fed is making “good” cuts, the market tends to do well:
Stock returns
Diving more specifically into the data on rate cuts below, historical trends show when we have a normalization cut, which is what this “good” cut feels like, the market is up on average 13.2% twelve months later:
Building on that, when the Fed cuts around all-time highs (as we are now), the stock market is up 100% of past examples for an average gain of 13.9%.1
Tough part of the schedule
Sometimes, in sports, you’ll hear about how it’s the challenging part of a team’s schedule when they play better teams in back-to-back weeks.
That’s where the stock market is right now.
September and October have historically been poor months for stocks:2
But after the tough stretch, we will get into the best historical quarter for stocks:
In Q4, stocks are positive ~80% of the time!
How much longer
How much longer can the current bull market go?
Diving back into history, sorry, it’s all I have, on average bull markets last 1,131 days (just over three years) with market return of +152%:
The current market run is only 486 days old, with a slightly under 60% return.
Seems like we could keep running for some time.
In the podcast episode, my co-host asked, “What could derail this run?” It will be something out of left field that no one is considering at the moment. That’s what makes changes to your investments based on headlines tricky.
Consumer
A significant determinant of how long this economic cycle will last depends on how consumers continue to spend.
That spending has continued to chug right along. Below are real (adjusted for inflation) income and expenses. Inflation ate into consumer income in 2021-2022,3 but we are back to the pre-COVID trend lines:
So, friends, keep supporting the economy out there!
R&D
Drug prices are way out of my realm of expertise. I found the below chart interesting, where sales of Ozempic and Wegovy will eclipse all of Novo Nordisk’s R&D for the past three decades:
That’s essentially one drug’s revenues (now profit is a different thing) covering all of the company’s research.
Wild times. It makes you wonder what else we will create in the future.
Reach out with your questions, and I can answer them here!
DISCLOSURE
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Sources:
There are a few theories about why stocks perform poorly in these months, but none hold up to modern times.
For example, one theory centered on the flow of capital during the farming harvest. That theory doesn’t exist anymore.
You can see below that wages (in red) are finally outpacing inflation (in blue):
