The Federal Reserve cut interest rates on Wednesday as U.S. stocks traded near a record high, leaving investors searching for historical clues about where markets are headed next.
The S&P 500 SPX It briefly traded above its record close as of July 16 after the Fed Applied a 50 basis point rate cut before erasing gains to end down 0.3%. Stock index futures pointed to strong gains that could lead the S&P 500 and Dow Jones Industrial Average DJIA higher. Trying to reach a record again.
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Do Rate cuts with the stock market at or near historic highs Do they provide additional fuel for bulls or portend trouble ahead? Dow Jones Market Data reviewed the tape.
They found that since 1990, the Federal Reserve has cut rates seven times while the S&P 500 was at or near (within 1%) an all-time high (see table below).
In those cases, stocks tended to rise on the day of the decision (not including Wednesday): they rose 71.4% of the time, with an average gain of 0.51%. Six months later, the performance is mixed: they rose 57.1% of the time, with a tepid average gain of 0.62%.
JPMorgan analysts looked at data going back 40 years and found that the Fed had cut rates 12 times, with the S&P 500 within 1% of an all-time high. The market was up a year later all 12 times, with an average return of about 15%.
It’s interesting, but does it really tell investors much about the direction of the stock market throughout the easing cycle? As countless market observers have noted, it actually tends to It depends on the economic context.
“Historically, only half of the bond rally has occurred when the first cut comes. The direction of the stock market is less clear: entirely
“It will depend on whether the Fed has avoided a recession or whether this rate easing came too late, as we have witnessed so many times in the past,” he said. David Rosenberg of Rosenberg Researchin a note on Wednesday.
“The danger this time,” he wrote, “is the extreme level of complacency and the widespread consensus that the business cycle has been reversed.”
Related: History says Fed rate cuts create a “lottery” for stock market investors
—Ken Jimenez and Steve Goldstein contributed.
