The First Rate Cut By The Federal Reserve: Analyzing Its Effect On S&P 500
When the Federal Reserve announces a rate cut, the financial world often holds its breath.
But what does this mean for the stock market, particularly the S&P 500, when the FED makes its first-rate cut?
A fascinating chart from Goldman Sachs illuminates this topic, revealing a trend that challenges common perceptions and offers insights into market behavior since 1980.
This is the chart that Goldman Sachs made:
Related reading:
The Initial Impact of a Fed Rate Cut
When the Federal Reserve initiates its first rate cut, the S&P 500 is generally expected to benefit.
This pattern has been observed consistently over the past four decades, suggesting that the initial rate cut can be a bullish signal for the market. The chart above shows exactly that.
However, this trend comes with a significant caveat:
The Recession Factor
The positive correlation between the Fed’s initial rate cut and the S&P 500’s performance holds true unless the economy enters a recession within the following 12 months.
In such cases, the market typically experiences a downward trend. This highlights the critical role economic conditions play in determining how the market responds to monetary policy changes.
Soft Landing vs. Recession: A Tale of Two Scenarios
The data from Goldman Sachs presents two distinct scenarios.
In the event of a soft landing, where the economy avoids a recesson post-rate cut, the S&P 500 tends to perform well, often moving higher. This contrasts sharply with the market’s response during an impending recession, where a downward trend is more common.
Challenging Preconceived Notions
Many investors, including we, have been under the impression that the Federal Reserve’s first rate cut is almost certainly a bearish event.
Moreover, we assumed the market had already discounted future rate cuts.
However, Goldman Sachs data challenges this notion. It suggests that, in most cases, the first rate cut does not necessarily lead to a bearish market.
Instead, the market’s response is more nuanced and heavily dependent on the broader economic context.
Conclusion
The relationship between Federal Reserve rate cuts and the S&P 500 is complex and influenced by various factors, particularly the state of the economy. To do macro forecasting is almost impossible to succeed at.
While a first-rate cut can be a positive signal for the market, its impact is significantly altered if the economy is heading toward a recession. Investors would do well to consider these nuances when making investment decisions after a Fed rate cut. The chart from Goldman Sachs not only provides historical context but also serves as a reminder of the unpredictable nature of financial markets.