Is Cutting Rate REALLY Positive for the U.S. Stock Market and its Economy?
The Fed is facing pressure to cut rates amid signs of slowing economic growth. The benefits of the 2017 tax cuts have waned and President Donald Trump’s tariff threats with China and Mexico have roiled financial markets. Last week, Fed Chair Jerome Powell set off a rally on Wall Street after he signaled that the Fed is willing to cut interest rates to help stabilize the economy if the trade war between Beijing and Washington starts to dampen growth. But Is cutting rate REALLY positive for the U.S. stock market and its economy?
The above chart shows how Fed benchmark Federal Funds rate tightening cycles end since 1915. It seems that most of the time, Fed is always late into the game to prevent any crisis/recession. Let’s just zoom in and focus on the last 5 times when Fed paused rate hike.
The above chart shows almost 4 decades of market history. The benchmark Federal Funds rate is in white, the S&P 500 is in green, and past recessionary periods for the economy are in red.
We can see that when the Fed “paused/stopped” hiking rates in 2006, it was just before the start of a massive bear market and the deepest U.S. recession since the Great Depression. The S&P 500 ultimately plunged by around 57%.
We can also see that when the Fed paused/stopped hiking rates in 2000, it was just before the start of a massive Tech-led bear market and yet another recession. The S&P 500 ultimately tanked by 50%.
The Fed paused in the late 1980s and that was followed by a lousy market and yet another recession. Oh, and we also experienced a little something known as the Savings & Loan crisis around that time. Hundreds of financial institutions ultimately failed at a cost of around US$160 billion, according to the General Accounting Office and FDIC.
We could go even further back to the early 1980s, when yet another Fed halt was followed by a weak market and recession. But I think you get the picture.
The ONLY time a Fed pause after a notable series of rate hikes was bullish for more than a short period of time was in 1995. But that was also only a few years into a bull market and economic expansion. UNLIKE today when we have a 10 year bull run for stocks and one of the longest expansions in modern history.
So is cutting rate REALLY positive for the U.S. stock market and its economy? IF history is any guidance, I am NOT so optimistic. I remain bullish for the intermediate-term (more than 1 month but less than 1 year). However, long term (more than 1 year but less than 10 years) wise, the risk:reward is not bullish and this aging bull market will PROBABLY end around 2020/2021.
We are now going through Sovereign Debt Crisis 2.0, which will ultimately cause the major governments of Europe, Japan and U.S. to go bust, therefore the impact will be more DEVASTATING than what we had experienced during the 2007–2009 Global Financial Crisis (GFC). This will result in what I called the 2017–2022 Wealth Redistribution Operation (WRO), the BIGGEST Wealth Transfer since the 1929–1939 Great Depression!
How can we take advantage of WRO while others will be wiped out by this financial catastrophe and wonder what hit them? To find out, please visit: https://timingandyou.com/timing-and-you-cycle-analysis/
Timing is Everything! 时机就是一切!
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** Please note that this is NOT to be regarded as an advice or a recommendation, it is meant for EDUCATIONAL AND INFORMATION PURPOSES only and it does not constitute an investment advice, an offer or solicitation to purchase or sell the investment asset classes mentioned.
