Broker Check
Interest Rate Cuts Can Wait

Interest Rate Cuts Can Wait

April 09, 2024

The stock market was down modestly overall last week, with a sharp reversal and drop on Thursday as the market has remained indecisive over the past few weeks. It feels like investors are fearing a short-term downturn but that’s been the case for most of this year.

The highly anticipated interest rate cuts continue to weigh on investor sentiment with a somewhat misguided view of ‘the more cuts the better, and sooner than later’ is all the market needs to rally higher. Lately, some Fed members have pushed out the time frame for rate cuts and reduced the number of cuts they expect this year. I think these discussions are dampening the market rally in the short-term by deflating investor sentiment, but I believe this is a positive development and strong economic conditions and corporate earnings will likely lead the rally higher still.

Higher interest rates negatively affect certain parts of the economy, like real estate or the automotive industry, but the total economy and the stock market often do just fine with relatively higher rates and consistent rates. I believe that keeping interest rates steady for longer or even slightly increasing them can lead to continued strong stock market performance, and also that small reductions in rates over the next few years can also lead to positive stock market performance. However, if the Fed cuts rates quickly and significantly, it could signify other problems in the economy and lead to a significant drop in the stock market.

The current market climate and my curiosity around the relationship between changes to the Fed Funds Rate and the performance of the S&P 500 inspired me start a research project to better understand the correlations. This analysis goes back to 1954 and is initially showing me that a relatively stable rate has led to some very profitable years in the stock market. Stocks have also performed quite well during times of modestly rising interest rates, while large and quick rate reductions usually go hand in hand with a major economic recession and stock market declines. This is a simplification of the data and other factors need to be layered on top of this analysis to get a more accurate picture and be helpful in forecasting. Over the next couple of months, I will dig deeper into this analysis and include my findings in future weekly Market Insight emails.

Photograph by: Alison Pang on Unsplash

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