Markets Can't Wait Forever for Fed Cuts

The Federal Reserve's decision to lower its benchmark interest rate to a target range between 4.75% and 5.00% in September 2024 was a major headline event, but it was not a surprise. The market had already adjusted in anticipation of this move, reflecting the efficient pricing of expected outcomes. This is evident in the performance of small-cap stocks, which experienced their best single month of performance in two decades in July 2024, driven by the anticipation of the Fed’s rate cut plan. Additionally, the 30-year mortgage rate, which was 7% in July, dropped to 6.2% by September, and the 10-year Treasury yield, which was at 4.4% in July, now hovers near 3.7%. These trends show that the market had already done much of the Fed’s work for it, reflecting the market's efficient pricing of expected outcomes.

Historical data from Ned Davis Research shows that stocks perform well in the 12 months following the first rate cut. Since 1974, stocks have been positive 80% of the time, with an average return of 15%. However, the performance varies significantly depending on whether a recession follows the rate cut. In periods where a recession hits, returns one year later are positive only 33% of the time, with an average return of negative 8%. Conversely, in periods where the Fed cuts rates without a recession, stocks are positive in every period, with an average return of 22% one year later. This data highlights the importance of the economic context surrounding the rate cuts in determining market performance.

The magnitude of the rate cut also plays a role in investor sentiment. The Fed's decision to opt for a 50-basis-point cut instead of the usual 25-basis points during the hiking cycle was perceived as a more aggressive move, which may give many the impression that the Fed is concerned about the economy. This perception can influence investor behavior and market trends. For example, Pimco Chief Investment Officer Dan Ivascyn discussed this topic and was blunt in his assessment, stating, “If you have a three-to-five-year time horizon, this is really noise,” while adding, “it’s less important than people think it is.” This perspective suggests that for long-term investors, the immediate impact of rate cuts may be less significant than the broader economic trends and market conditions.



To anticipate the Fed's next moves on interest rates, investors should monitor several key economic indicators and market signals. Economic indicators such as GDP growth, unemployment rates, and inflation provide insights into the overall health of the economy and can influence the Fed's decision-making process. For instance, the Fed's decision to cut rates in September 2024 was likely influenced by economic data showing signs of strain on lower-income consumers and concerns about a potential recession.

Market sentiment and perceptions also play a crucial role. The Fed's actions and communications can significantly impact market sentiment. For example, the Fed's decision to opt for a 50-basis-point cut instead of the usual 25-basis points during the hiking cycle may give investors the impression that the Fed is concerned about the economy. This perception can influence market behavior and expectations for future rate cuts.

Corporate investment and innovation can also serve as an indicator of economic health. The level of investment by large corporations can provide insights into the overall economic outlook. For example, the world's largest and most profitable companies are investing at the highest levels in recorded history, driven by expected productivity gains from artificial intelligence and other innovations. This surge in investment seems inconsistent with a recession and may signal a more optimistic outlook for the economy.

In conclusion, while the Fed's rate cuts are a significant event, their impact on the market is often already priced in by the time they occur. Investors should focus on the broader economic trends and market conditions, rather than the immediate impact of rate cuts. By monitoring key economic indicators and market signals, investors can better anticipate the Fed's next moves and adjust their investment strategies accordingly.