The latest Fed decision on interest rates will be this week, and LPL Research doesn’t expect any change in policy. We do expect, however, that this meeting is setting the stage for a rate cut at the July meeting, which will be key for the Fed as the economic backdrop remains supportive of no rate cut. With the global economy slowing and continued worries over the lingering trade dispute between the United States and China, the bond market is now pricing in multiple rate cuts for the rest of 2019. This all sets a high bar for how the Fed will position itself for a cut when the economy is healthy, suggesting a potential language change is more likely than a policy change at the upcoming meeting.
Stocks and Rate Cuts
With the odds in favor of a rate cut in July, what will stocks do after the initial rate cut? After all, the Fed has been hiking rates since December 2015, and this change in policy could upset the apple cart. Many investors are worried because the initial rate cut in 2001 and 2007 did little to slow an economy that was headed for a recession, followed by major bear markets soon after. However, if you go back a little further in history, the good news is the initial rate cut has actually been quite bullish. Periods like 1984, 1995, and 1998 are all regarded as “insurance cuts” against the various global concerns at that time. LPL Research sees many similarities between now and the 1995 and 1998 rate cuts, which could suggest continued gains for stocks for at least the coming year.
As the chart shows, after the five initial rate cuts before 2001 (1984, 1987, 1989, 1995, and 1998), the S&P 500 rose an average of 11.1% and 15.8% over the subsequent 6 and 12 months, respectively. We think these cases provide better comparisons to today’s environment. Even including the poor stock market performance after the 2001 and 2007 cycles, the average S&P 500 gains over subsequent 6 and 12 months were a respectable 4.5% and 5.8%
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