Displaying items by tag: cuts

(New York)

Investors may be a little hazy on how forthcoming Fed rate cuts might affect stocks. One kind of assumes they will be positive, but then again, rate cuts mean the economy is worsening, so the picture becomes a little hazy. Well, a pair of top research analysts have just weighed in on the question and say the market’s reaction is likely to be positive. The year after a second rate cut stocks generally rise strongly, with the Dow up an average of about 20% in the next one year. However, this only holds if it is not too late to hold off a recession. That said, the gains from a second cut have often been immediate, “Perhaps because the second cut demonstrates the Fed’s commitment, or perhaps because the liquidity from the first cut had begun to work through the system, the gains have been immediate, with an average jump of 9.7% three months after the second cut”, say analysts at Ned Davis Research.

FINSUM: As we have said recently, we think the market is re-entering a post-Crisis goldilocks phase consisting of an accommodative Fed and a not-too-weak economy, the combination of which is very supportive of asset prices.

(New York)

How might retail stocks react to rate cuts? That question hasn’t gotten much air time lately, but is a good one considering how much investment there is in the sector. Generally speaking, low rates should be good for the sector as they would technically stoke consumer spending. However, the logic there gets skewed based on the underlying economy (i.e. how it is trending). For the current environment, the answer is that some retail stocks will benefit handsomely, while others will struggle. The “haves” will do well, while the “have nots” will continue to suffer. The “haves” include Amazon, Lululemon, Costco, while the “have nots” include cash strapped retailers like Gap and J.C. Penney.

FINSUM: So basically a rate cut will help those who are already doing well, but won’t do much for the rest of the sector. This makes sense, as it is hard to see consumer spending changing much at the current stage of the cycle.

(New York)

The broad expectation is that rate cuts will boost all bonds. To some degree this is likely true. However, not all bonds will be affected to the same degree. For instance, safe bonds—think investment grade corporates and Treasuries—have likely already seen most of the gains they will. But high yields are a different story, as they are much more likely to see a decent rally, as lower borrowing costs are a bigger boon to those companies and the cuts themselves will help sustain the economic cycle, which is more important for them than for ultra-safe companies.

FINSUM: This seems to be pretty good analysis. This rate cut has been widely projected and safe bonds have already seen gains, so junk may be the biggest beneficiary.

(Washington)

The Fed has historically been the level-headed kid at the party, always trying to calm things down when they got out of hand. But that appears to no longer be the case, as Powell surprised even the most dovish investors with his very soft statements last week. What comes next may shock markets—some think the Fed will make a rare 50 bp cut in their July meeting. How the market would react is anyone’s guess (likely positive initially). “Historically the Fed has wanted shock and awe when they ease”, says the CIO of Northwestern Mutual Wealth Management.

FINSUM: The Fed seems like it wants to go big, despite the fact that unemployment is at record low levels and prices are stable. The central bank clearly wants to keep the bull market rolling.

(Washington)

There was a lot of anxiety yesterday about what the Fed might do. The big banks were taking the opposite side of markets, saying that the pace of rate cuts that investors expected were unrealistic. Then Fed chief Powell spoke and it became clear that markets were right, the Fed is completely dovish and has fallen in line with investor expectations. Powell signaled that rate cuts were on the immediate horizon, which has led markets to up their odds-making of a rate cut in July to 100%.

FINSUM: Powell was about as dovish as a central banker ever gets short of the middle of a crisis. For us this is quite an unusual situation—an economy doing well with both of the Fed’s dual targets being met, yet there is an undeniable sentiment towards cutting rates.