The S&P 500 index briefly touched its all-time highest levels on Tuesday before fading off into the afternoon, investors are certainly antsy for the Fed’s meeting Wednesday the 18th where the expectation is that rate cuts will be getting announced. Investors have been pricing in rate cut probabilities for a while now and as such, markets have been hesitant this week going into the Fed’s decision. Commodities such as Gold rose on anticipation last week but struggled this week as investors remain hesitant and want to wait for the Fed’s decision before deploying more capital.
At the end of trading on Tuesday the CME Fed-funds futures sees a 59% chance of a 50 basis-point rate cut and a 41% chance of the traditional 25 basis-point rate cut. Markets have essentially priced in a 100% chance that a rate cut will be occurring, if the Fed doesn’t cut rates it would be absolutely disastrous for the markets. Although consumer optimism seems to be falling on the side of a 50 basis point cut, the most likely situation will be for the Fed to announce a 25 basis point cut and then reevaluate next month after more data can be seen.
There is one thing to keep in mind however, what will it be like if the Fed cuts rates while the S&P is sitting near all-time highs? This is a question that Emily Dattilo of barron’s tackles in her article, “Here’s What Happens When the Fed Starts Cutting Rates With the S&P 500 Near a Record High”. Barron’s went back and reviewed how the S&P 500 has performed after rate cuts all the way back to 1990. Since that time only 7/50 of the cuts have occurred within 1% of the market’s all-time high. Markets have performed extremely well post-rate cuts in that time period, but some investors aren’t so optimistic about the future after the upcoming cut. Jason Goepfert of SentimTrader’s said, “Much ink has been spilled on the implications, and we won’t wade into potential macroeconomic repercussions. We’re also not going to participate in the delusion that we can know whether this cut will precede an economic recession, which can dramatically impact forward returns.”
Overall its an exciting time with the inevitable rate cut underway, it could be the start of a roaring bull market, or the preceding event in a recession. Investors will have to carefully watch how the markets react to the rate cut to see how best to navigate the following months.
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