✂️ Cuttin' time - what's next for stocks?

The Fed surprised a lot of us with a 0.5% rate cut, but what usually happens when rate cuts start?

So the Fed started a rate cutting cycle for the first time since late 2019 this week (people forget that the economy was pretty weak in late 2019 even before COVID struck). The big news wasn’t that a cutting cycle started, but that it was a 0.5% cut versus a more typical 0.25% cut. So, regarding stocks, what happens next?

It’s a little hard to tell from the graph (stonks just go up), but typically the market would be weak heading into and just after a rate cutting cycle. This makes sense — remember that rate cuts are usually there to boost a bad economy, although the economy today still appears to be quite strong. After the shorter-term weakness around the cut, the market would typically show strong gains for the next 12-months.

Reuters put together a great set of analysis on this and found fairly different averages. This data is difficult, though. For example, a rate cutting cycle began in 2007 but the market didn’t collapse until late 2008 (people also forget the recession associated with the Financial Crisis actually started in early 2007).

Regardless, the market has reacted mostly positively since Fed day. One of the big tests will be to see whether or not mortgage rates continue to decline — they are almost below 6% for the first time since late 2022.