Is a Fed rate cut always good for the stock market? Analysts say: Not necessarily! It depends on this factor.
1min read Interest rate cuts by the Fed will provide some relief for companies struggling with the cost of borrowing. However, historically, rate cuts have not always been good for the stock market.
It depends on whether the economy is about to enter a recession, according to Andrea Cicione, head of research at GlobalData and TS Lombard, who said in a note to clients on Friday: “Lower rates are usually a response to the economy heading towards recession.”
To illustrate this, his team tracked the performance of the S&P 500 index during Fed rate-cut cycles between 1984 and 2019. The data showed that the stock market typically rose in the days following the first rate cut. However, it started to fall a few weeks after the first rate cut when the economy started to contract.
The S&P 500 rose 0.47 per cent on Friday, the Dow Jones Industrial Average rose 0.13 per cent, and the Nasdaq Composite Index rose 0.51 per cent, after a volatile week. The VIX index surged this week, with global markets falling on Monday after investors unwound yen carry trades. The week was also marked by a weak July jobs report that raised concerns about the US economy.
While a recession could hurt the stock market, Mr Cicione noted that investors could still benefit from holding bonds during a recession, as bonds typically outperform stocks during recessions.
The 10-year US Treasury yield was 3.94 per cent on Friday, down from 3.78 per cent earlier in the week, the lowest level in more than a year. “However, when a recession is avoided, stocks tend to outperform bonds over the long term,” he said.
