The Fed is expected to lower interest rates when it issues its policy statement in the coming hours, which would be the central bank’s second reduction in 2019.
Based on the performance of the stock market in the past following a rate cut, at issue for the market’s performance could be how dire the economy is now. It will also determine how successful the Fed will appear to have been in staving off a downturn.
Four of the past eight easing cycles since 1981 have been identified as “insurance” cycles, when problems loomed. The four others occurred when the economy was entering, or already in, recession, according to a research from Allianz Global Investors.
One distinction in easing cycles is that smaller-cap stocks tend to outperform large caps, according to Jefferies research. Small-cap stocks have climbed 28% overall in the 12 months following the first rate cut, compared to 15% for large caps, the firm said.
Smaller companies are perceived to be more leveraged to the state of the economy of the U.S. They also have higher debt loads or weaker balance sheets, according to Jefferies equity strategist, Steven DeSanctis, with lower rates are expected to improve both situations
The Dow Jones Industrial Average .DJI has gained an average of 20.3% one year later following a second rate cut in a cycle. This is according to Ned Davis Research.
“Perhaps because the second cut demonstrates the Fed’s commitment, or perhaps because the liquidity from the first cut had begun to work through the system, the gains have been immediate, with an average jump of 9.7% three months after the second cut,” Ed Clissold, chief U.S. strategist at Ned Davis Research, said in a recent report.
US stocks could go north with the Feds poised for a 25 basis point cut as opposed to 50 basis points.
“History would suggest bulls should be rooting for a 25 basis point cut this week, as these are more viewed as ‘insurance cuts’ versus a 50 basis point cut, which could mean the Fed sees real trouble down the road,” said Detrick, senior market analyst at LPL Financial.
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