Key Takeaway
There is a lot of speculation in the media and many "calls to action" for our Federal Government to cut rates. So what does this mean for the market? One would think that by cutting rates, ie: reducing the cost of goods and services for Americans, that it would be a good thing for the economy, right? Well, when you look at history it tends to illustrate the exact opposite. Below is a chart of the past 25 years specific to the Fed Funds rate.
So when we contrast the Fed Funds monetary policies to the performance of the S&P 500, it begins to paint a clear picture. As we approach another potential shift in rates, it's essential to understand the historical context and implications of such moves. The US Central Bank's interest rate is at its highest level since 2007, following the most aggressive hiking cycle in over 40 years (due to inflation). Despite these high rates, the stock market has performed quite well, reaching new all-time highs. The Fed uses rates to help reduce the impact of an economy teetering on decline. With the employment numbers beginning to rise, while still having high inflation, it puts the Fed in a difficult position. If inflation persists and they cut rates, they risk Stagflation (slowing growth with inflation), which plagued the markets from the late 1960s till the early 80s. So what will they do? If they act too slowly while unemployment climbs, the market could erode quickly; however, if they cut too quickly, they risk continued inflation. Sounds to me that they will be trying to thread the needle of Stagflation. While we anticipate a US recession within the next several years, this does not imply an immediate danger for financial markets. This current market pullback is partly due to an overextension experienced this year, all on top of a historic slow couple of months (August & September). We have removed a little risk and will continue to monitor and make adjustments as necessary in order to help protect. As technical conditions improve, we'll redeploy.
