Don't view rate cutting cycle as ‘new era’: Strategist

As the Federal Reserve (Fed) prepares to lower interest rates for the first time since the onset of the COVID-19 pandemic, investors are eager to understand the potential impact on the stock market. While conventional wisdom suggests that stocks tend to perform well during rate-cutting cycles, strategic investors warn against viewing this as a new era of guaranteed returns. This article explores the nuances of rate-cutting cycles and why investors should remain cautious.

The Fed is widely expected to reduce its target rate from the current range of 5.25% to 5.50% on Wednesday, September 18, 2024. The extent of the cut remains uncertain, with investors divided between a more aggressive 0.50% reduction or a more cautious 0.25% cut. The uncertainty surrounding the size of the Fed's move has grown in recent days, as reflected in the bond market's wide swings.

The Fed's 'why' matters because it influences investors' perceptions of the central bank's confidence and control. A 50-basis-point reduction in rates could signal a Fed in panic mode about the economy, or it could telegraph a willingness among committee participants to make a bold, confident move in the early days of an easing cycle. As such, traders are keenly focused on the scope of the first cut.

In conclusion, investors should not view a rate-cutting cycle as a new era of guaranteed returns. Instead, they should focus on the underlying fundamentals, the Fed's attitude, and the interplay between earnings growth and rate changes. By doing so, investors can make better-informed decisions and navigate the potential uneven performance of different market sectors during a rate-cutting cycle.