Will the US stock market really be bullish with the Fed's interest rate cut?
The Fed's rate cuts will provide some breathing room for companies struggling with soaring borrowing costs. However, historically, rate cuts are not always beneficial for the stock market.
Finance app, Zhītōng Cáijīng learned that Andrea Cicione, research director at GlobalData and TS Lombard, pointed out that this depends on whether the economy is about to go into recession. Cicione wrote in a report to clients on Friday: "Lower rates are usually a reaction to the economy heading for a recession."
To illustrate this, his team tracked the performance of the S&P 500 during Fed rate cut cycles between 1984 and 2019. The data showed that in the days immediately following the first rate cut, the stock market usually rises. However, when the economy begins to contract, the stock market begins to decline in the weeks following the first rate cut.
After a tumultuous week, US stocks rose on Friday, with the S&P 500 rising 0.47%, the Dow Jones Industrial Average rising 0.13%, and the Nasdaq Composite Index rising 0.51%. This week, the "panic index" (CBOE Volatility Index) skyrocketed, and global stock markets plummeted on Monday as investors unwound the yen carry trade. In addition, the weak July jobs report has raised concerns about the resilience of the US economy.
Although a recession can hit the stock market, Cicione noted that investors can still benefit from holding bonds when a recession occurs, as bonds generally outperform stocks during an economic contraction.
On Friday, the yield on 10-year US Treasuries was 3.94%, down from a high of 3.78% earlier this week, the lowest level in over a year. He wrote: "However, when a recession is avoided, stocks tend to outperform bonds in the long term."
Editor/Emily