Why We’re Confident Stocks Will Soar Thanks to Rate Cuts

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    Yesterday, the U.S. Federal Reserve cut interest rates for the first time since COVID-19 emerged four years ago. And after initially sliding in response to the jumbo 50-basis-point cut, the stock market is now surging to all-time highs. 

    This behavior isn’t unusual. 

    We knew going into this Fed meeting that it was possible for a large rate cut to elicit a reaction similar to panic within risk assets. That’s because it could be seen as a sign of an impending recession.

    But as we’ve mentioned before, the U.S. economy has managed to avoid a recession thus far. Plus, the data implies that it will continue to handily navigate any recessionary risks.

    Now, as it happens, when the economy avoids a recession while the Fed cuts rates, the S&P 500 tends to rally over the three-, six-, and 12-month periods following the first cut. And in fact, given the nature of yesterday’s rate cut, history strongly suggests that stocks will soar over the next year.

    History Offers a Post-Rate-Cut Roadmap

    The Federal Reserve’s present rate-cutting cycle just began with stocks at all-time highs. 

    This has happened before – in fact, it’s occurred about 20 times since 1980. That is, over the past ~45 years, the Fed has cut interest rates while stocks were within 2% of all-time highs about 20 times before. 

    Every single time, stocks were higher a year later, with an average return of nearly 15%.

    In other words, history shows that when the Fed cuts interest rates with stocks near all-time highs, stocks almost always soar over the following year. 

    Well, that’s exactly what just happened yesterday. So, does that mean stocks will head to the moon over the next year?

    We think so – because this is about more than the market. It’s about the economy, too. And right now, per real-time estimates of GDP, the U.S. economy is growing at a ~3% pace, with jobless claims running around 1.8 million claims. 

    In other words, the U.S. is still experiencing good economic growth with low joblessness. 

    So, that means the Fed also just cut rates while the economy is still growing and joblessness is still low. That, too, has happened before. In 1987, 1989, 1995, 1998, and 2019, the central bank began a rate-cutting cycle while GDP was still running largely north of 3% and jobless claims were largely below 2.5 million. Each time, stocks soared over the next year, with an average return of 17%.

    Now, nothing is fool-proof; we live in quite an unpredictable world, after all. But considering this strong historical precedent, it seems there’s a great chance stocks will rake in market gains over the next year.

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