Investors have long hoped the Fed would begin cutting interest rates, but data suggests the outcome could spell trouble for stocks. On average, the S&P 500 typically gains 2% 65 days before the central bank’s first rate cut after a rate hike cycle, according to Strategas data. But 65 days after the first rate cut, the index typically falls 1.5%, meaning there may not be wild swings in stocks following major announcements. “The dispersion in returns following the first rate cut reinforces the view that investors need to be more aware of the Fed’s timing when it begins to cut rates,” Strategas managing director Ryan Grabinski told clients in a note last week. Figures vary widely from case to case. In 1974, for example, the S&P 500 fell more than 8% in the 65 days before the rate cut, but fell more than 25% in the same period after the rate cut. The composite index rose more than 12% in the 65 days before the rate cut and rose more than 9% in the period after the rate cut. The average performance may pour cold water on the prospects of investors who are hedging hopes of a rate cut this year, according to CMEGroup. According to the FedWatch tool, federal funds futures indicated the possibility of at least one rate cut as early as September, with a possible second rate cut at the final meeting of the year in December, as consumer and wholesale inflation data showed signs of uncertainty last week. In signs of cooling, hopes for a near-term interest rate cut have increased. Consumer price index in May was unchanged from the previous month, and wholesale prices unexpectedly fell 0.2%. On Tuesday, the latest reason for optimism on interest rates emerged, with May retail sales data slightly lower than the economics. That may add to growing evidence that consumer spending is slowing down, but some are warning against falling entirely into a “bad news is good news” mentality. “While this may be good news for inflation hawks, it could be the beginning of a slowdown in economic growth,” said Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance. “The big story in this bull market is the resilience of consumers, and without them the economy would have slowed down or gone into recession a long time ago,” Grabinski warned. With an unemployment rate of 4%, historically the Fed has rarely found sufficient reason to lower interest rates. But Grabinski believes that the central bank’s next move, in addition to keeping interest rates steady, is more likely to be a rate cut because of what he calls “a high bar for further interest rate increases.”
