Stock Market Outlook: Potential for Continued Growth Following Second Fed Rate Cut
The Federal Reserve recently made a significant move by announcing a rate cut of 50 basis points, marking the beginning of a monetary policy easing cycle. This decision, made almost unanimously, caught the markets off guard, with the US dollar bearing the brunt of the impact. Federal Reserve Chairman Jerome Powell delivered a relatively balanced policy statement and press conference, carefully treading to avoid alarming investors about the state of the US economy.
While Powell emphasized a meeting-by-meeting approach like other central banks, the dot plot projections unveiled that two additional 25 basis point rate cuts are expected by Fed members for 2024. This is slightly below market expectations for further easing this year, with the potential for a November 7 rate move looming.
Historically, the Federal Reserve’s actions in easing cycles have shown a tendency towards back-to-back rate cuts. Looking back at six easing cycles since 2000, data reveals that in four out of six instances, the Fed opted for a second rate cut at the subsequent scheduled meeting. This pattern increases the likelihood of another rate cut being announced on November 7, following the initial 50 basis point reduction.
The timing and magnitude of the second Fed rate cut have varied in the past, with instances ranging from a 100 basis point cut during the Covid pandemic outbreak in 2020 to 25 basis point moves in more stable economic periods such as 2002, 2007, and 2019. The duration between the first and second rate cuts has also fluctuated, showcasing the Fed’s adaptive approach to meet its dual mandate of promoting maximum employment and stable prices.
Looking ahead, the upcoming Fed meeting on November 7 presents a unique scenario, occurring just two days after the US presidential election. The outcome of the election may influence the Fed’s decision, especially if there is uncertainty surrounding the results. Despite this, market sentiment indicates a strong belief in a November rate cut, with a substantial 43% probability assigned to another 50 basis point reduction.
Market Performance between Fed Rate Cuts
Analyzing the performance of key market assets between the first and second Fed rate cuts provides valuable insights into potential trends. In the last five easing cycles, the dollar/yen exchange rate experienced an average decrease of 1.5%, a pattern that could repeat given the Bank of Japan’s stance on rate hikes. Similarly, US treasury yields typically decline during this period, with few exceptions like the spike in 2008 due to increased government borrowing for relief programs.
The performance of other assets such as pound/dollar, the S&P 500 index, gold, and WTI oil prices can vary based on underlying economic conditions. In times of distress like 2008 and 2020, these assets tend to plummet, as evidenced by significant drops in the S&P 500 index and oil prices. Conversely, during more stable economic periods like 2001, 2002, 2007, and 2019, these assets have shown a propensity to rally, with the S&P 500 index recording an average increase of 2.4% during these times.
Putting It All Together
In conclusion, the period between the first and second Fed rate cuts presents opportunities for investors to gauge market movements and position themselves strategically. While dollar/yen and US treasury yields typically decrease during this phase, the performance of other key assets like pound/dollar, the S&P 500 index, gold, and oil prices is contingent on prevailing economic conditions.
As investors navigate the evolving landscape of monetary policy and economic indicators, staying informed and adaptable is crucial. The upcoming Fed meeting on November 7, amidst the backdrop of the US presidential election, will likely provide further clarity on the trajectory of the stock market and key assets. With the potential for continued growth following the second Fed rate cut, investors are advised to monitor developments closely and make informed decisions to capitalize on emerging opportunities in the market.
