Celebratory Rate Cuts

When is a rate cut not an emergency rate cut? When it’s a “celebratory rate cut” - a term coined by Callie Cox, whom you should be subscribed to immediately by the way.

Callie’s making the point that sometimes the Federal Reserve cuts because they can and they should - policy is overly restrictive relative to current conditions. And sometimes they cut because they have to - an emergency cut with even more emergency cuts to come later.

In 2019, the Federal Reserve began cutting rates after having raised them throughout the prior year. As the economy slowed (thanks, Tariffs) it became obvious that policy was unnecessarily restrictive and there was room to get less restrictive. We don’t know what would have happened were it not for the pandemic emergency cropping up a year later, but those early 2019 cuts were celebratory.

Unfortunately for investors, these episodes of celebratory cuts are not particularly memorable. The rate cutting cycles that stand out in our memories are the emergency ones. So there is a reflex in market psychology where we automatically equate cutting cycles with oncoming recessions. We need to stop that nonsense.

Callie and Chart Kid Matt did this incredible visualization of what I’m talking about for Ritholtz Wealth Management clients and I think you’re going to want to digest it. We’re showing you all the cuts that preceded a recession within 12 months and all the cuts that didn’t:

As you can see, interest rate cuts have not historically meant a “slam dunk” recession call. Sometimes a cut is just a cut. The Y axis is S&P 500 performance rebased to 100 on the left scale and on the right scale it’s the date of the first interest rate cut of the cycle. The X axis is days after the first cut. You can plainly see that in many cases after the first cut we did not have a recession (the blue lines). There are even some instances where we did have a recession (red lines) but stock market performance did not go negative from the time of the first cut.

Which means the range of outcomes after the initial cut are all over the place. Crafting a narrative for what will happen to either the stock market or the economy (or both) as a result of the initial interest rate cut is an exercise in telling fairy tales. You cannot know because it’s unknowable. Durable portfolios are the right answer, not predictions, not extrapolations, not cherry-picking to satisfy a predetermined opinion.

I bring this to your attention because based on the June CPI report we got this week, it’s apparent that the first rate cut of the cycle is now at hand - likely in July or September. You will read and hear innumerable amounts of opinions about what this means and where things are surely headed. I want you to be armed with this information so that you don’t fall prey to the financial media industrial complex and start making a lot of bad decisions with your long-term investments.

And if you want to circumvent all of the nonsense, one easy thing you can do is talk to us. Certified Financial Planners are standing by.

Get On With It Already

“Get on with it already” is the message Neil Dutta of RenMac has been wishcasting into the conversation these last six months and now it appears that the rest of the market has come around to his view. Neil has relentlessly made the case that the Fed is and has been too restrictive and that the balance of risks has now definitively shifted to the downside.

Labor market stats are indicating that rates should be less restrictive. So are inflation stats. This week the shelter market indicators finally cracked, putting the “data dependent” Fed on notice that the time is now at hand to shift the conversation.

We got into a range of topics with Neil from the futility of focusing on elections to the importance of tuning out popular indicators that no longer have meaning. Neil nailed the “No Landing” call in early 2023 when most of his peers were debating the timing of the inevitable recession that never occurred. By the time the markets realized he was right, stocks had already rallied furiously and reputations had been eroded away into the sea. Many large firms like Morgan Stanley and JPMorgan had dismissed their chief strategists in the aftermath, but the money had already been made (or lost).

Now Neil is saying the Fed is at the precipice of a point of no return. If they truly are data dependent, they have just gotten all the data they need to act.

You’re not going to want to miss this episode. You can listen to The Compound and Friends now on all podcast platforms. We’ll be up on YouTube at the end of the day if you want to see the charts too.

Okay, that’s it from me this week. Wishing you a wonderful weekend, talk soon! - JB