Stock History Makes Case for Limited Rate Cuts -- Update
September 17 2019 - 6:08PM
Dow Jones News
By Jessica Menton
Investors and politicians jockeying for a long cycle of
interest-rate cuts from the Federal Reserve should be careful what
they wish for.
President Trump has criticized the central bank's monetary
policy, calling for the Fed to reduce short-term rates to "ZERO, or
less" to help bolster the U.S. economy. But history has shown that
the stock market tends to fare well when the central bank takes a
more measured approach.
Fed Chairman Jerome Powell has sought to draw parallels to 1995
and 1998, when the Fed started cutting rates three times. In both
cases, the economic expansion continued and the S&P 500 rose
15% and 8.6%, respectively, from when the central bank first
lowered borrowing costs to when it last cut them, according to Dow
Jones Market Data.
That compares with declines of 28% and 40% for the index during
the extended rate-cutting cycles that began in 2001 and 2007 --
both of which were recessionary periods.
"If this is the beginning of a full-blown rate-cutting cycle by
the Fed, stocks don't do well after the first cut," Mike Wilson,
equity strategist at Morgan Stanley, said in a research note. "On
the other hand, if the cut is not associated with a further
slowdown, but rather with a reacceleration or stabilization in
growth, then equity markets have a chance to move higher."
In five prior rate-cutting cycles since 1984 that have happened
outside of recessions, the S&P 500 on average rose 11% over the
subsequent six months and 16% over the next year from the first
cut, according to LPL Financial.
The index has ticked up 0.8% since the Fed cut rates in July for
the first time since the depths of the financial crisis in 2008. It
is up 20% for the year and within 0.7% of July's all-time closing
high, but investors remain on edge in the midst of uncertainty over
the U.S.'s long-simmering trade war with China and signs that
weakness abroad is starting to spill over into the domestic
economy.
The Fed is widely expected to lower interest rates following its
two-day meeting Wednesday for the second time in three months. But
a batch of mixed data on the health of the U.S. economy has left
investors unsure about the direction of future Fed policy.
Federal-funds futures, used by investors to place bets on the
course of central-bank policy, point to a 50% chance the Fed will
cut rates this week, according to data from CME Group. That is down
from 92% a week ago, easing after strong retail-sales data Friday
signaled that Americans continued to boost spending in August.
The rate outlook beyond this week is less clear, however, as
other economic data remain muted. Hiring slowed in August, and
factory activity has eased. Now the market is pricing in just a 41%
chance of a third rate cut by the end of 2019, down slightly from a
week ago.
Some analysts and investors have said the Fed likely has a
limited easing path in light of recent consumer-price data that has
pointed to an uptick in inflation. Meanwhile, a surge in oil prices
following a weekend attack on Saudi oil facilities has raised
concern about a pickup in inflation, which could prevent the Fed
from cutting rates aggressively.
"We wouldn't label this as a 'rate-cutting cycle,'" said Adam
Phillips, director of portfolio strategy at EP Wealth Advisors.
"That would imply the U.S. economy is in need of a rescue, and we
don't see this risk of a recession being too high right now."
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Write to Jessica Menton at Jessica.Menton@wsj.com
(END) Dow Jones Newswires
September 17, 2019 17:53 ET (21:53 GMT)
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