IT bubble and since Lehman, the "initial 0.5% interest rate cut"! Can it have a soft landing? Promising investment opportunities?
The United States has finally entered an interest rate cut cycle. The interest rate cut was 0.5%.The "initial 0.5% rate cut" is the first since the IT bubble and the Lehman shock..
On September 18, when the Federal Reserve significantly lowered interest rates as expected by the market, the S&P 500 index rose 1% immediately after the announcement. However, towards the closing, selling pressure prevailed. This was because Chairman Powell stated that "50 basis points is not a new pace of rate cuts." Against the backdrop of recession concerns, investors hope for continued significant rate cuts. On the following day, September 19, the S&P 500 index rebounded by 1.7% and reached an all-time high. The expectation that the U.S. economy can avoid a recession and achieve a soft landing was dominant due to the "preventive rate cut" of 0.5%.
Based on the market trends over the past two days,currentlyHowever,the soft landing scenario is prevailingon the other hand,Persistent concerns about recession.It can be seen that there are concerns. The recent employment statistics are weak, and the U.S. economy may be traumatized by the experience of recession (in 2001 and 2007) after the initial 0.5% significant rate cut by the FRB. This time, it may be checking the past rate cut cycle and the situation of 2001 and 2007.Check the past rate cut cycle and the situation in 2001 and 2007andConfirm the investment stance after the 0.5% rate cut and identify promising investment opportunitiesSaid.
Why did the FRB decide to make a significant 0.5% rate cut in the first place?
Powell, Chairman: 'From the economic and risk management perspectives'.
The Fed has often implemented a 0.25% rate cut in the first cut. Therefore, before the FOMC on September 17-18, the probability of a 0.25% rate cut was overwhelmingly high. However, as the FOMC approached, 'dove' comments from Fed watchers and senior US officials continued, and the probability of a 0.5% rate cut overtook 0.25%. Regarding the decision to cut rates by 0.5%, Chairman Powell said, 'From both an economic and risk management perspective, this logic is clear to me.'
Powell, Chairman: 'From the economic and risk management perspectives'.
The Fed has often implemented a 0.25% rate cut in the first cut. Therefore, before the FOMC on September 17-18, the probability of a 0.25% rate cut was overwhelmingly high. However, as the FOMC approached, 'dove' comments from Fed watchers and senior US officials continued, and the probability of a 0.5% rate cut overtook 0.25%. Regarding the decision to cut rates by 0.5%, Chairman Powell said, 'From both an economic and risk management perspective, this logic is clear to me.'
◇ FOMC Members: More Concerned About Unemployment Than Inflation
In this decision, 11 FOMC members were in favor and 1 member was opposed. Why did the majority support a significant 0.5% rate cut? Some insight can be gained from the evaluation of economic uncertainty and risk by FOMC participants.
In this decision, 11 FOMC members were in favor and 1 member was opposed. Why did the majority support a significant 0.5% rate cut? Some insight can be gained from the evaluation of economic uncertainty and risk by FOMC participants.
When comparing the evaluation of economic uncertainty and risk by FOMC participants between June and September, there were clear changes. At the time of June, there were many members who were concerned about inflation uncertainty, but this time it has decreased. On the other hand, there are more members showing more caution towards the unemployment rate.
Regarding the significant interest rate cut this time, the market is interpreting that the US financial authorities have taken proactive measures in response to the uncertainty of the unemployment rate and the economy. Except for certain economic indicators such as the unemployment rate, the US economy remains robust. The view that the significant interest rate cut by the Federal Reserve has increased the possibility of a soft landing is gaining momentum. On the other hand, based on data such as the unemployment rate, there are also suggestions that the Federal Reserve's interest rate cut may be lagging behind. Going forward, it will be necessary to pay attention to the trends in the unemployment rate and employment.
● Historical Rate Cut Cycle and S&P500 Index
When we examine the trend of the rate cut cycle and S&P500 index (since 1985), we can see that the performance in the 3 months after the first rate cut has risen 5 times (with varying degrees of increase) and fallen 2 times. Among them, the 2 instances of decline occurred when a 0.5% rate cut was implemented (in 2001 and 2007), and in both cases, the US economy entered a recession in the next quarter after the rate cut.
When we examine the trend of the rate cut cycle and S&P500 index (since 1985), we can see that the performance in the 3 months after the first rate cut has risen 5 times (with varying degrees of increase) and fallen 2 times. Among them, the 2 instances of decline occurred when a 0.5% rate cut was implemented (in 2001 and 2007), and in both cases, the US economy entered a recession in the next quarter after the rate cut.
Based on the above, it can be said that the post rate cut stock price performance depends on whether the US economy enters a recession or experiences a soft landing. However, whether or not it entered a recession will not be known until later. If the current main scenario unfolds as a soft landing, the stock price reaction on September 19th will be correct, and the stock market is expected to continue to rise. On the other hand, if the risk of entering a recession increases depending on future economic indicators, there is also a possibility that selling pressure may dominate, as was the case on September 18th.It might be better to take a "cautiously optimistic" stance at the moment.
Looking back on 2001 and 2007
The past, FRB implemented a 0.5% interest rate cut for the first time in 2001 and 2007. This time, it is the first 0.5% interest rate cut since then, so the "trauma" of the bursting of the IT bubble and the global financial crisis may come to the minds of investors. Therefore, I decided to briefly review 2001 and 2007, and compare them with the current situation.
The past, FRB implemented a 0.5% interest rate cut for the first time in 2001 and 2007. This time, it is the first 0.5% interest rate cut since then, so the "trauma" of the bursting of the IT bubble and the global financial crisis may come to the minds of investors. Therefore, I decided to briefly review 2001 and 2007, and compare them with the current situation.
In 2001: Entered a recession after the bursting of the IT bubble
In January 2001, the FRB implemented a 0.5% interest rate cut. Afterwards, both the S&P 500 index and the NASDAQ 100 index underwent significant adjustments. The United States entered a recession in the following March.
In January 2001, the FRB implemented a 0.5% interest rate cut. Afterwards, both the S&P 500 index and the NASDAQ 100 index underwent significant adjustments. The United States entered a recession in the following March.
On the other hand, if we look at the movement of the NASDAQ 100 index and the FF rate (graph above), we can see that the bursting of the IT bubble occurred slightly before the interest rate cut started. In response to the overheated financial market during the IT boom, the FRB implemented consecutive interest rate hikes from 1999 to 2000, and the IT bubble burst in 2000. The FRB shifted to an interest rate cut in the following year (2001).
This trend seems a little different from the current situation. This time, the rate hikes from 2022 to 2023 were aimed at confronting inflation. And while the Federal Reserve (FRB) was implementing financial tightening, the Nasdaq 100 index continued to rise. The AI boom was $NVIDIA (NVDA.US)$ This is because the performance of companies led by the company pushed up. The reason the Nasdaq 100 index has shown a slightly corrective tone since July is due to concerns about how long the performance expansion driven by the AI boom will continue. Coincidentally, this coincided with a period when expectations of interest rate cuts intensified and concerns about a recession emerged. While interest rate cuts are generally advantageous for tech stocks, if they are aimed at recession response, they can be disadvantageous for stocks in general.
◇2007: The global financial crisis was triggered by the collapse of the US real estate bubble and the subprime loan issue.
In the mid-September of 2007, the Federal Reserve implemented a significant 0.5% interest rate cut. At that time, the US real estate bubble collapsed (housing prices peaked in 2006), and the subprime loan issue evolved into a global financial crisis. After the 0.5% rate cut, the Nasdaq 100 index rose for approximately 2 weeks, but then plummeted. In the following quarter, the US entered into a recession.
In the mid-September of 2007, the Federal Reserve implemented a significant 0.5% interest rate cut. At that time, the US real estate bubble collapsed (housing prices peaked in 2006), and the subprime loan issue evolved into a global financial crisis. After the 0.5% rate cut, the Nasdaq 100 index rose for approximately 2 weeks, but then plummeted. In the following quarter, the US entered into a recession.
This time, it can be said that there is no real estate bubble collapse or subprime loan issue like back then. If there is anything, it might be the backlash of extensive fiscal support and stimulus under the pandemic. The current US economic indicators are generally firm, and it seems that the US economy is overcoming the backlash reduction. However, the rising trend of the unemployment rate is somewhat eerie and cannot be denied. It may be necessary to be cautious about the increasing recession risk depending on future economic indicators.
If you take an "optimistic yet cautious" stance, would diversifying investments be effective?
Overall, it seems better to take an "optimistic yet cautious" stance at the moment. It may be good to ride the momentum of the rebound in tech stocks on September 19th, following the soft landing scenario. On the other hand, if the entire portfolio is heavily skewed towards tech stocks, it may be advisable to slightly increase the proportion of bonds that benefit from rate cuts and defensive stocks. Gold tends to rise during a financial easing cycle, and if recession concerns persist, it may further push up gold prices. In any case, it's important to maintain a cautious posture, keep an eye on the US economic indicators and the overall market trends when trading. Also, when trading, it seems wise to incorporate the "time diversification" method.
Overall, it seems better to take an "optimistic yet cautious" stance at the moment. It may be good to ride the momentum of the rebound in tech stocks on September 19th, following the soft landing scenario. On the other hand, if the entire portfolio is heavily skewed towards tech stocks, it may be advisable to slightly increase the proportion of bonds that benefit from rate cuts and defensive stocks. Gold tends to rise during a financial easing cycle, and if recession concerns persist, it may further push up gold prices. In any case, it's important to maintain a cautious posture, keep an eye on the US economic indicators and the overall market trends when trading. Also, when trading, it seems wise to incorporate the "time diversification" method.
Created on September 20th, 24 by Market Analyst Julie
Source: Created by Bloomberg for moomoo Securities
Source: Created by Bloomberg for moomoo Securities
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
Read more
Comment
Sign in to post a comment
大負けネコ : As expected, Mr. Bit Valley Investor,
️
️" from last November, starting with textbook purchases of "Soros stocks and Buffett stocks." I started investing in semiconductor-related stocks around January, and also purchased "NVIDIA, Intel, Microsoft, AMD, Applied Materials, IBM, Google, etc." and made a lot of profit with "N's One Shot."
" observed by the deterioration of employment statistics and manufacturing index since the end of last month.
️" in times of crisis.
️ fund."
️," the ratio of US stocks is about "15 to 30% of the total investment assets (including mutual funds)." Since there is no "NISA growth investment slot" this year, I plan to "buy more US stocks" mainly after January next year.
renewed" are still smoldering, aren't they?
️" in the "end of this year or next year."
️."
The point that individual investors like me, who have experienced past market crashes, are most concerned about is the "recession concerns of the US economy." I have been comparing it with the "recessionary phases" after the two previous "0.50% drastic rate cuts by the FRB."
Because I am a "value stock-oriented" investor, I entered the US market as a "US stock beginner
However, even though it is said that "if this rate cut is 0.50%," the "US economy is strong," I have been constantly concerned and thinking about countermeasures for the "renewed concern about the recession
If the "recession cycle" is viewed from the perspective of "cycle rotation," it would be "public utility, consumer goods, resources and energy," etc., and "gold
Since I started with "value stocks," I also have "diversified investments" in "high dividend and value stocks" such as P&G, 3M, AT&T, Verizon, Coca-Cola, Kraft & Heinz, NWN, AbbVie, NVO Nordics, Medtronic, AIG, Jackson Financial, Wells Fargo, Citi, CVR Energy, etc., as well as ETFs such as SPYD and SPLB. I am currently looking for additional "value stocks."
Also, my main battlefield is the Japanese stock market, so I add "growth and profit announcement stocks" to the original "value stock start stocks" and invest in mutual funds such as "US growth stock fund, global equity top focus, Fidelity world undervalued growth stock fund," etc. And from just before "8/5 Reiwa Black Monday," I added additional mutual funds such as "European growth stock fund and gold
Of course, I also have monthly investments in "accumulated NISA investment slots" such as Orkan, 8 asset allocation, NEXT FANG+, and iShares India Stock, etc.
Since I am a "US stock market beginner
So, what I can do now is to use the appreciation of the yen to "diversify investments" in "long-term, regional, stocks, and commodities" with "dollar foreign currency deposits = accumulated ordinary deposits & dollar time deposits for 6 months & 1 year," etc.
"Japanese stocks," "US stocks," and "total investment assets" are already in a state of "human-investment trustification?"
However, the eyes of "recession concerns
I don't like it〜. Even though this year's "blamans" is a "decline for the first time in 16 years since the 2008 Lehman Shock," it can be interpreted as "possible that there will be a decline in the overall US market" and "another market crash
"More cash on hand" & "less holding position" and "diversified investments." Is this the "safe direction"? Well, the investment style is free, so the "correct answer" won't be known until the end of the adjustment phase. I will continue to carefully search for the "best move" without having any regrets later like "if I had referred to that comment."
I would like to express my gratitude for providing very useful information and for the comparison and analysis.
Thank you very much
I will continue to refer to it.
From a small individual investor & "US market beginner
183531506 : It has become a reference.