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Economy, Stocks  | June 7, 2019

The market is increasingly salivating at the prospect that the Federal Reserve may make its first interest-rate cut of the cycle, possibly next month.

The Dow Jones Industrial Average rallied for three straight sessions and gained ground on Thursday as well, after an array of dovish remarks from Fed officials, including Chairman Jerome Powell.

David Rosenberg, chief economist and strategist at Gluskin Sheff, points out why that’s not a logical reaction.

Sure, he notes, the year after the first rate cut, equity market returns in the next year averages out to a gain of 9.5%, according to data going back to the 1980s. But the year after the last rate cut, the total return on the S&P 500 is 22%.

Even in soft landings — that is, when the Fed cuts rates and the economy doesn’t fall into recession — the Fed usually cuts three times, as it did between 1995 and 1996 and again in 1998.

Furthermore, it matters of course whether a recession ensues or not. The S&P 500 index on a 12-month basis, after that first rate cut when a recession occurs, drops 7.2%. The net return on the 10-year note is 7.4% in the first year of the Fed easing into a recession.

But in the three months after the last recessionary rate cut, the S&P 500 climbs 20.3%, and bonds rise just 0.3%.

And market models of recession risks are climbing. The New York Fed’s model, he points out, rose in May to the highest non-recessionary reading in 12 years.

A revolutionary initiative is helping average Americans find quick and lasting stock market success.

275% in one week on XLF - an index fund for the financial sector. Even 583%, in 7 days on XHB… an ETF of homebuilding companies in the S&P 500. 

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