Does the Federal Reserve cut interest rates sharply to benefit risky assets? Historical results are

Last Friday, Federal Reserve Chairman Powell sent a very clear signal: interest rate cuts will begin soon and may continue in the foreseeable future. The market also gave a very clear response: interest rate cuts are beneficial to all asset classes, except the US dollar.

However, the analysis pointed out that from the historical trend, it does not support the initial market reaction last Friday, that is, a sharp interest rate cut and a strong enough economy can support risky assets.

Liz Ann Sonders of charles schwab said:

If you want the Fed to start a radical interest rate cut cycle, then you should be careful of your own desire. The sharp drop in benchmark borrowing costs may be very unfavorable to both stocks and high-risk bonds.

In modern financial history, there are 14 complete Fed cycles. Although the market has different reactions to interest rate cuts in different periods, there are some obvious trends: when the Fed cuts interest rates quickly, the market performance will be worse than that in the case of gradual interest rate cuts. In the scenario of rapid interest rate cut, within one year after the first interest rate cut, the maximum retracement is twice that in the scenario of gradual interest rate cut.

So in fact, you should hope that the Fed will cut interest rates by escalator, not by elevator.

Although the market generally welcomes the shift of the Fed's monetary policy and generally considers it positive, it is obviously also worried that traders are dreaming of an unrealistic scenario, and the pricing of related assets is questionable:

At present, according to the federal funds futures market, traders expect the Fed to cut interest rates by more than 200 basis points by the end of next year, and cut interest rates eight times in the next eight FOMC meetings. At the same time, there is no actual economic growth decline. This is typical of both want and want.

Judging from the credit market and the stock market, it is a bit like whistling through the grave, assuming a soft landing or at most a slight recession.

Many people in the industry believe that although some current US economic data are somewhat weak, it should be possible to avoid a serious economic downturn. In this case, the bond market has cut interest rates too many times. If the Fed cuts interest rates sharply, the economic data needs to be very bad, accompanied by the pricing of economic recession. Judging from the current situation, from the perspective of the Federal Reserve, it seems that the market's interest rate cut expectations are too optimistic. At the same time, the market is a little too accustomed to think that interest rate cuts are naturally beneficial to stocks.

At present, the market expects to cut interest rates by 50 basis points at the FOMC meeting in September, which has been withdrawn from the market crash in August. Most Wall Street banks predict that the Federal Reserve will cut interest rates by 25 basis points in September, but some analysts in JPMorgan Chase, Citigroup and Wells Fargo still expect to cut interest rates by 50 basis points.

Earlier, Michael Hartnett, a well-known analyst at Bank of America, pointed out that since 1970, the Federal Reserve has cut interest rates for the first time 12 times. When the Federal Reserve chooses to cut interest rates because of the Wall Street crash or the credit crisis, that is, panic rate cuts, it will boost risky assets. According to historical data, the S&P 500 index will rise by an average of 20% in the following six months after every panic rate cut by the Federal Reserve.

But Hartnett warned that this time is different. He advised investors to sell their assets decisively when the Fed cut interest rates for the first time in this cycle. The particularity of this year is that risky assets have risen to an extreme level-US stocks rose by 32% in the first nine months, while before the 12 "first interest rate cuts" in history, the average increase of the stock market was only 2%.

Risk warning and exemption clause

The market is risky and investment needs to be cautious. This paper does not constitute personal investment advice, nor does it take into account the special investment objectives, financial situation or needs of individual users. Users should consider whether any opinions, viewpoints or conclusions in this article are in line with their specific situation. Invest accordingly at your own risk.