Fed's Rate-Cut View Set to Test Resurgent US Stocks Rally

As the Federal Reserve (Fed) prepares to cut interest rates for the first time since 2020, investors are wondering how this move will impact the resurgent US stocks rally. The Fed's rate-cut view is set to test the market's resilience, with experts weighing in on the potential outcomes.



The Fed is expected to lower its benchmark interest rate by 25 basis points, a move that could boost the stock market by making borrowing cheaper for businesses and consumers. However, the rally in US stocks has been driven by strong corporate earnings and a robust economy, which could limit the impact of the rate cut.



Historical data suggests that stocks don't always climb after a first Fed rate cut. In 2001 and 2007, the S&P 500 was down 10.7% and 2.1%, respectively, three months after the first cut. In contrast, the index was up 8.23% in 2019. The reason for the mixed performance is that investors' feelings about the strength of the economy outweigh their enthusiasm for lower borrowing costs.



Callie Cox, chief market strategist at Ritholtz Wealth Management, explains that "the economy really matters in terms of how markets respond to policy pivots. Is the Fed cutting interest rates out of celebration, or desperation? If these are rate cuts out of celebration, then lower rates are really good for the stock market. But if the Fed has to swoop in out of desperation and cut rates, typically that's bad for stocks."



The Fed's rate-cut view will test the resurgent US stocks rally, with investors keeping a close eye on incoming economic data. The August jobs report, due on September 6, will likely receive the lion's share of the attention. A disappointing report could swing traders' expectations toward a more dramatic 50-basis-point cut, which could have a more significant impact on the market.

In conclusion, the Fed's rate-cut view is set to test the resurgent US stocks rally, with investors focusing on the underlying economic conditions and the reasons behind the Fed's rate cuts. While a rate cut could provide a short-term boost to the market, the long-term impact will depend on the broader economic context and the market's reaction to the Fed's communication and future rate decisions.