Are Fed Rate Cuts Good for Stocks?

During the July Fed meeting, the chair of the Fed, Jerome Powell, said, “If the labor market were to weaken unexpectedly…we are prepared to respond.” Following that meeting, we had a jump in unemployment that sent the market into an abrupt selloff amid a relatively calm year for markets. The “weakening labor market” that Powell mentioned may very well be here. Given that, the market is pricing in some Fed rate cuts through the end of the year. As a reminder, it is generally stimulative for the economy when the Fed cuts rates because companies and consumers can borrow at cheaper rates.

The Fed doesn’t cut rates for no reason. It generally does so when the economy shows signs of slowing, so the chances of a recession are higher. Going back to 1970, there have been 18 instances of a “first Fed cut,” and in 11 of those instances, we had a recession the following year.

Source: A Wealth of Common Sense

However, the economy and the stock market are two different things. We can have a recession, and the stock market can go up. Despite a recession occurring most of the time, the market is up 72% of the time one year later—just about the same as any given year. In addition, the market is up 13% on average one year later, higher than the long-term average of 10%.

Are positive returns guaranteed? Absolutely not. A few notable first cuts were in 2001 and 2007, with massive bear markets following them. However, Fed cuts and the risk of a recession are not reasons alone to change your investment strategy.

Happy Planning,

Alex

This blog post is not advice. Please read disclaimers.