Here’s What The Market Did Every Time The Fed Cut Rates During An Economic Expansion

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The market is now at record highs, and unemployment is way down. Even so, a U.S. rate cut is expected as early as this week. During his congressional testimony last week, Federal Reserve Chairman Jerome Powell raised concerns over slower global growth and trade tensions, which in turn have contributed to weaker demand and manufacturing activity. The most recent Global Manufacturing Purchasing Manager’s Index (PMI) showed that, at 49.4, factories contracted for the second straight month in June. We haven’t seen back-to-back sub-50.0 PMI readings since the second half of 2012.

There’s also a one-in-three chance we could see a full-blown recession sometime next year. That’s according to the New York Fed’s recession probability index, which flashed a 12-year high of 32.9 percent last month. Since 1960, every time the index has surpassed 30 percent, the economy has tanked within the next 12 months.

probability of a US recession has surged to pre-crisis levels

 

Despite the risks, the U.S. economy is still expanding—an unusual, though not unheard-of, time for the Fed to consider cutting rates.

So let’s assume for a moment that the Fed does take action this year. What effect would that have on the stock market as well as manufacturing activity?

That’s precisely what analysts at market research firm Fundstrat looked into recently, and what they found is that 100 percent of the time, the market increased in the next three, six, nine and 12 months. The median gain over nine months, in fact, was nearly 18 percent.

Hypothetically, if the same thing were to happen today, that would put the S&P 500 Index at around 3,500 by next April.

Forward market returns following an initial fed rate cut during expansionary periods

 

Once again, for those in the back: In every case going back to 1971, when the Fed began a new easing cycle while the economy was expanding, stocks went up three months, six months, nine months and 12 months later. No exceptions.

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That wasn’t the case with manufacturing activity. According to our own research, the ISM Manufacturing Index, which measures the U.S. sector, rose only a third of the time three months following a rate cut in good times. Six and nine months out, the index was up half the time. Twelve months out, it was higher about 66 percent of the time.

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