There has now been back to back Fed rate cuts but this does not necessarily mean better performance on the stock exchange. However, the S&P 500 has shown a rise on average of 1.56%. This comes following the Federal Reserve trimming interest rates for the second meeting in a row.
Chairman Jerome Powell, who is the Policy maker, cut their benchmark rate by a further 1/4 of a percentage point to a range of 1.75% to 2%. This was expected and has now led to the likes of the S&P 500 index and the Dow jones Industrial Average, trading at near records.
The S&P 500 Index, known as the S&P is a stock market index that measures the performance of 500 of the largest companies listed in the United States. This is why it is now one of the most commonly followed equity indicators and it is widely considering as one of the best when it comes to representing the U.S stock market. The index also includes many multi-national companies. The index is also updated every 15 seconds, with price updates correlated by Reuters. The S&P 500 is also maintained by S&P Dow Jones Indices, which is majority owned by S&P Global.
When looking through the history of when rate cuts are implemented, there is never a clear correlation of results. Actually on average, the S&P 500 has climbed 2.88 from the first cut to the last, during a successive two cut period. This means that the average return is 1.28% when there is back to back cuts.
The S&P 500 market has also climbed in three of the past five periods in which there has been two Fed rate cuts. They are usually 1.56% higher on average than others and this rises to 1.74% during successive cuts. The first consecutive cut was made in 1989 and this saw a climb of 8.42%. The following consecutive cut was then in 1998 and saw a rise of 11.95%.
2001 was then the next consecutive cut but this saw a deduction of -10.16%. It was then a similar result in 2007 as the successive cuts led to a deduction of -3.26%. This meant an overall average of back to back at 1.74%. However, looking at this you would think it is more likely to lead to a possible reduction at the more recent results. This is why these cuts do not necessarily mean a better performance on the stock exchange as previously mentioned.
So what about when there is more than two rates cuts? This is of course a distinct possibility in the near future. On average, the market actually tends to decline by 2.14%, with the market tumbling 41.18% during the 10 rate cuts between September 2007 and December 2008. This gives further information that rate cuts do not simply mean a positive reaction on the stock exchange, which would be expected.
Of course, not all rate cuts are created equally. Such as the current series of interest-rate reductions are being implemented as ‘insurance cuts’. These are intended to push back on the continued issues that have surfaced following the import duty dispute between China and the U.S. This feud has on occasions threatened to cause a global economic slowdown. However, looking through history, you would expect that better performance will follow.
In the past, growth has tended to follow after a second and third cut. The value will then grow back over the coming months and there will be an overall win come the end of the year.
