Going into yesterday’s Federal Reserve Board meeting, the futures market was pricing in an 85% chance that the Fed will cut rates by the end of July. This came without supportive or consistent commentary from Fed officials suggesting that rate cuts are imminent – until yesterday.  Wednesday’s Fed decision keeps rates unchanged, but eight Fed board members indicated at least one rate cut later this year is likely.  And the word “patience” was dropped compared to prior statements which had been tied to leaving rates unchanged.  So the announcement didn’t provide any fireworks but leaves the Fed an opening for a July cut.

Usually, one rate cut is followed by more cuts.  What can equity investors expect following the first rate cut of a new easing cycle?

Over the last 30 years …

The table shows the first rate cut is usually followed by higher stock prices.  But even the expectation of a rate cut could provide fuel for this month’s rally to continue.
The stock and bond markets are telling us two different things. The disconnect between these markets points to a debate among investors just how much the trade fight with China will hurt consumer spending, business investment, and other drivers of economic growth. The bond market is telling us, through sharply lower rates, economic growth will be much slower ahead; maybe even a recession is looming.  As a result, a Fed rate cut is still expected as soon as July to start the next easing cycle.  Equity investors see things differently and have been more positive – especially this month.  They see an economy that remains solid with growing earnings (at a much slower pace than 2018, but not the rollover some had feared), jobs being created, and rising wages.
Which market is correct?  The bond market has a better predictive record, but we are siding with stock investors on this one.  Economic data is not showing a recession on the horizon and corporate earnings growth this year has beaten expectations, with growth expected to return to double digits next year. 


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