The question of how the stock market reacts after the Federal Reserve begins cutting interest rates does not have a straightforward answer, Market Watch reports.
According to historical data, it can go in either direction. Jason Goepfert, a senior research analyst at SentimenTrader, recently noted that the aftermath of a rate cut has been unpredictable, with no consistent pattern in stock market performance following significant hiking cycles.
The Federal Reserve is expected to lower its key interest rate after concluding its two-day policy meeting. Traders are anticipating a rate cut of either 25 or 50 basis points. Meanwhile, stock markets have been relatively steady, with the S&P 500 briefly hitting a record high and the Dow Jones Industrial Average also nearing a peak.
Historically, the period following an initial rate cut has been a mixed bag for investors. Goepfert pointed out that the last three initial cuts after a hiking cycle preceded major bear markets. Yet, prior to that, no discernible pattern emerged, and the stock market’s proximity to a multiyear high before the cut didn’t seem to make a significant difference in outcomes.
Analysts agree that context plays a critical role in how the market reacts to rate cuts. When rate cuts are perceived as a proactive measure to prevent economic downturns, they can create a favorable environment for stocks. However, when the Federal Reserve is seen as reacting too late to economic warning signs, investor confidence can be shaken, leading to volatility.
Goepfert emphasized that predicting economic outcomes is not the focus. Instead, the research suggests that stocks have shown either “decent gains with low risk or limited gains with high risk” over time. The two-week period following a rate cut has often acted as an early indicator. If the risk is perceived to outweigh the reward in this time frame, it may signal a more challenging year ahead for investors.
