Elevator Going Down

Friday, September 20, 2024

Fed pivots

Earlier this week, the Fed announced a 50bps (basis points or 0.50%) reduction to the Fed Funds Rate, their key interest rate and primary lever for carrying out monetary policy. In his post-meeting press conference, Chairman Jay Powell also charted a course for two additional cuts this year and four more in 2025. The pivot in policy marks the first rate cut since 2020, and comes in response to falling inflation figures and an uptick in the U.S. unemployment rate. As a result of the cut, interest rates offered throughout the financial markets will reset lower; most notable will be the decrease in earnings on cash deposits. We have already seen a 10bps decline in the rate paid on our insured deposit sweep program. Offering some relief, loan markets will also see a decline with mortgage rates already reaching the lowest level since 2022.

What about the investment markets?

While the sample size is limited, the data are compelling. Of the 14 rate cycles since 1929, 12 of them saw the S&P 500 Index post positive returns for the 12-month period following the first rate cut. The two negative periods occurred after the Fed began cutting rates in 2001 (dot-com bubble) and in 2007 (subprime mortgage crisis). While these two data points are fairly recent, the current economic environment and healthy corporate and consumer balances sheets are notably different.

Source: Charles Schwab, Bloomberg, and the Federal Reserve. Data from 8/9/1929 through 7/31/2020. 

It’s always important to identify what’s driving Fed policy this time around to garner a sense of where the market may be heading. While valuations for some large cap domestic equities appear a bit stretched, we still see room for additional growth ahead. This is especially true for traditional fixed-income investments which stand to benefit from the move lower in rates. As the rate decision moves to the rearview mirror, the market will focus its attention on the election in November and employment data. As noted in our prior communication, we anticipate a pickup in volatility surrounding the election, warranting a disciplined investment approach.

Please reach out with any questions; we would be happy to talk with you.