What happens when the Fed cuts interest rates for the first time?

We’re getting an interest rate cut approximately one month from now when the next Federal Open Market Committee convenes. Last week’s speech from Fed Chair Jay Powell practically guaranteed it. “The time has come” the man said. I can’t imagine what would derail it at this point.

In light of that, Callie and I have been discussing the topic a lot lately, prepping our clients and fans for a silly season filled with hyperbolic commentary. The truth is, there are only two things I really need you to know about what happens after the first interest rate cut.

Chart Kid Matt is ON IT

Matt Cerminaro on my firm’s research squad does a wonderful job illustrating the point I want to make in his charts below.

This is the history of fed cuts with a measurement of how the S&P 500’s forward returns and drawdowns have been in the 12 months from the date of these cuts. It turns out that the results were extremely dependent upon whether or not the reason for the cut was an impending recession.

• S&P 500 Forward 12M Returns from Cutting cycle start dates.

• Red bars are 12M Forward returns when a recession occurs within next 12M

• Blue bars are 12M Forward returns when a recession does not occur within next 12M

• Diamonds are the max drawdown over the next 12M from the first fed rate cut date.

• Averages are shown all the way to the right

One more chart we’ve used before - not every cut is followed by a recession, not every recession is accompanied by a brutal bear market. The chart below doesn’t predict anything about this cycle. It’s meant to demonstrate the range of potential outcomes so that you aren’t led astray by the last talking head you hear commenting on the subject.

Behold:

Here are the two key takeaways you should be aware of at a high level:

The average drawdown of 11% within 12 months of the first rate cut is only slightly higher than drawdowns averaging 9% over ALL 12 month periods.

Taking out the recessionary periods, the average drawdown of 4% within 12 months of a rate cut is literally as benign as it gets.

But there’s more…

What Are Your Thoughts?

You can tune in tonight to watch Michael Batnick and I parse the data and give you a framework for how to think about the coming of the first interest rate cut.

Tonight on an all new What Are Your Thoughts - we’re covering the upcoming Nvidia earnings report, the slowdown in leisure and hospitality spending, hedge fund manager Dan Loeb’s recent comments about Apple and a lot more.

We go live on Tuesdays at 5pm ET and the audience chatter becomes a part of the show. Join us this week and see for yourself.

Hit the link to watch and be sure to subscribe for the alert.

Enjoy the show, it’ll be waiting for you in case you can’t make the live. Or, via podcast s’il vous plait.

That’s it from me today, talk soon! - Josh