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Recap | Week Ahead | Types of Rate Cuts  Thumbnail

Recap | Week Ahead | Types of Rate Cuts

“Having, and sticking to, a true long term perspective is the closest you can come to possessing an investing superpower.” – Cliff Asness: Co-Founder of AQR Capital Management  

 

Last week's market recap: 

  • The S&P 500 closed the week up 4.06%. Year-to-date the index is up 19.13%
  • NASDAQ closed the week up 5.98%. YTD the index is up 18.43%
  • U.S. Aggregate Bond index closed the week up .51%. YTD the index is up 4.93%
  • 10-Year Treasury Rate decreased, ending the week at 3.66% down from 3.72% the prior week
    • Fed Funds Target rate remains at 5.25-5.50%
  • The 1-Year Treasury is yielding 3.98%  
  • A 6 Month Treasury is yielding 4.60%  

 

The week ahead:  

  • Fed interest rate decision 
  • Retail Sales 
  • Housing market data
  • Earnings: FedEx, General Mills, and more

 

Backdrop: 

  • Market volatility has increased recently, but stocks are still delivering strong gains and are near record highs.
  • Treasury yields touched 15 month lows.  Markets are pricing in steep Fed cuts over the next 6-12 months.

 

What happens after the Fed starts cutting interest rates?

The Fed is expected to start an extended phase of interest rate cuts this week.  Right now, Fed Futures are pricing in a 61% chance of a 50bp cut vs a 39% chance of a 25bp cut later this week.  The size of the rate cut may not be as important as… “What type of rate cut is this?"

The Fed typically cuts rates for 1 or 3 reasons. They cut because:

  • there is panic 
  • recession
  • to normalize rates

This week’s expected rate cut is to “normalize” rates.  The chart below takes a look at market performance after different types of rate cuts.

 


Historically, “normaliztion cuts” have resulted in positive S&P 500 returns 6 and 12 months later.  Obviously there are many other factors in the near term that could result in “this time is different.” For most long term investors, they should remain diverisfied and use volaitilty to rebalance and add quality exposure. 

As always, let us know if you have any questions.

 

Best, 

CRA Investment Committee

 

Matt Reynolds CPA, CFP®

Tom Reynolds, CPA 

Robert T. Martin, CFA, CFP®

Gordon Shearer Jr., CFP® 

Jeff Hilliard, CFP®, CRPC®

Joe McCaffrey, CFP® 

Phillip Tompkins, CFP®

 

* https://www.carsongroup.com/insights/blog/the-potential-impact-of-a-big-rate-cut-its-not-scary/

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