The wait is over.
Interest rates were cut by the federal reserve last week.
They reduced the federal funds rate by 50 bps or, to use the common tongue, 1/2 a point.
This all leads to some questions.
Are there more interest rate cuts to come?
The Federal Reserve projections say yes. The chart above indicates that Fed officials expect rates to go down more near year-end.1 By the time we get to 2026, they are forecasting it being down about another point.
Should you believe them? Jason Zweig tackles this in his book chalk full of satirical financial definitions:
CENTRAL BANK, n. A group of economists who believe that their current forecasts will turn out to be accurate even though their past forecasts have been unreliable, that their present policies will succeed even though their past policies have failed, that they can prevent inflation from occurring next time even though they didn’t prevent it last time, that they can foster lower unemployment in the future even though their practices worsened it in the past, and so forth.
You now should be able to answer this riddle: What’s the difference between a central banker and a weathervane? They both turn in the wind, but only the central banker thinks he or she determines which way the wind blows.2
Traders, whose opinions change moment by moment, believe the cuts will be a bit more dramatic. Bloomberg reports: “traders are pricing in about 70 basis points worth of easing by the end of the year — and nearly 2 percentage points of rate cuts by next September.”3
The wind of the economy, to combine Zweig’s illustration with biblical imagery, blows where it wills. It cares little what traders think and what central banks do to control it. As I’ve written before, the inklings of traders and the central bank are not facts about the future.
They are what we have to work with though.
What does history show about the impact of interest rate cuts on the stock market? Ryan Detrick over at Carson Group put together some startling historical data that is quite bullish.4 He showed that when the Feds cut rates while the stock market is near all-time highs (as it is at the time of this writing), the S&P 500 is up 100% of the time a year later. The investment return is a startling average of 13.9% and a median return of 9.8%.
We need some more context though. Investment return after cuts can vary widely on whether or not the economy goes into recession. Goldman Sachs lays out the spectacular or scary numbers for stocks going out 12 months under a recessionary and non-recessionary scenario4:
The good news is the current running estimates of GDP—a key barometer for recessions—by the Atlanta Federal Reserve, is hanging around +3%.6
Here’s the thing.
The future is as uncertain as the feelings and educated guesses of traders, Federal Reserve committees, and average Joe investors.
Sometimes the biggest danger to our investment plans is not recessions but our own investment decisions thinking we know when they will come, how long they will last, and which political leader might be the cause of one. The wind of change inside of us can be more ferocious and fickle than what happens outside of us. One person can do more damage to their investment portfolio than the economy or stock market itself would have.
The winds of external economic seasons and internal emotions about what is going on in the world and what that says about your money will shift throughout your financial journey. If you and the people you care about need a team to help you manage your money, consider us.
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Sources:
- Chart taken from Wall Street Journal homepage on Thursday, September 19th at 8:28am.
- Zweig, Jason. The Devil's Financial Dictionary (p. 50). PublicAffairs. Kindle Edition.
- Carter Johnson, “Big Banks Are Split on How Fast the Fed Will Cut Interest Rates”, 9/19/24. Accessed online: https://www.bloomberg.com/news/articles/2024-09-19/big-banks-are-split-on-how-fast-the-fed-will-cut-interest-rates
- Ryan Detrick, CMT (@RyanDetrick) on X at 8:35am on 9/19/24.
- Chart taken from Hamilton Lane’s Weekly Research Briefing on September 17th, 2024. Accessed online: Weekly Research Briefing
- “GDP Now” as of September 18, 2024. Accessed online: GDPNow