Loose Conditions An Odd Time For Fed To Cut Rates

The rally in the first half of 2019 and in June is historic as this could be the 6th time ever the S&P 500 is up 10% or more in the first half and 5% or more in June. The returns in the prior 5 examples in the 2nd half all didn’t match the first half gains, but that’s not surprising as it’s not common to see stocks spike double digits in 6 months especially after a rally. The best way to take this data isn’t to use it to predict future returns, but rather to reflect on the recent past with some context.

The quick summary of this fantastic performance is the Fed has switched sides (hawkish to dovish), the economy didn’t enter a recession like was feared late last year, and earnings growth didn’t turn out as bad as expected in Q1 & probably Q2. There is built-in hope on trade policy, but we have nothing to report on to tell us if that is right.

Rate Cut In Loose Conditions

The stock market has climbed the wall of worry which is made up of a cyclical slowdown, a trade war, and uncertainty on monetary policy. While a rate cut in an economic expansion that’s weakening doesn’t sound terrible, the Fed doesn’t have much ammo as rates are starting this cut cycle the lowest since at least 1955. They will get much closer to the zero bound if the Fed starts with a 50 basis point rate cut.

We continue our assessment of what this first rate cut means with the chart below which shows rate cuts plotted on a chart of the financial conditions index.

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