This is The Takeaway from today’s Morning Brief, which you can sign up to receive in your inbox every morning along with:
Stocks surged on Wednesday with small caps leading the way after muted June inflation data led investors to dial back expectations for future rate hikes.
A rate hike from the Federal Reserve at its July FOMC meeting in two weeks is still all but certain. But investors are now calling July the top for the Fed’s benchmark rate this cycle as market participants have priced out a September hike seen as likely only a few days ago.
The simplest read on this market action is that an easier Fed is better for stocks. Consider this just another coal on the fire fueling this summer’s bull narrative for the market.
And if this is indeed the end of the Fed’s rate hikes, history is on the bulls’ side. At least for a little while.
Data from Barclays shows that in the year following the final rate increase of the Fed’s last seven rate hiking cycles, the S&P 500 has, on average, gained 10%. A return that is in line with the index’s historical average annual gain.
The challenges for stock bulls begin, however, when rate cuts commence.
On average, the benchmark index has been flat in the year following the Fed’s first cut. And in 1981, 2001, and 2007, the index dropped closer to 20% (or more) following the central bank’s first move lower.
Of course, it usually isn’t the cut itself that does damage to the stock market, but rather why the Fed is cutting that inflicts the pain. Typically a weak or recessionary economy and a softening labor market prompt the Fed to act.
Investors have learned well in the last decade or so that lower interest rates are better for risky assets, and using this logic, the Fed cutting rates is good for stocks.
But with the Powell Fed forecasting four rate cuts in 2024 and four more in 2025, stock market bulls should be careful what they wish for. And why.
Click here for the latest stock market news and in-depth analysis, including events that move stocks
Read the latest financial and business news from Yahoo Finance
Source: https://finance.yahoo.com/news/why-stock-bulls-might-be-wrong-to-pray-for-fed-rate-cuts-morning-brief-113226671.html