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One of the biggest developments in the markets over the last few weeks has been the Federal Reserve’s shift to loosening monetary policy. On September 17th, the Fed opted to cut its benchmark interest rate by 0.50% to a range between 4.75-5.00%. This move largely reflected the view that the biggest risk for the economy was tilting from high inflation toward a cooling in the labor market. While the financial pundits in the media continue to speculate on the future path of interest rates, many investors just want to know what will happen with their stocks.
Every cutting cycle is unique, but we can still look to history for context on how the market has performed in the past when the Fed began to lower interest rates. The table below illustrates the last seven instances where the Fed transitioned from rate hikes to cuts. It also illustrates how the stock market subsequently performed.
Source: Morningstar Direct and Fred. Stock returns based on the S&P 500 Index. Returns longer than 1 year are annualized. Return calculation begins the 1st day of the month following the initial rate cut of the cycle.
Since 1980, the average annual return for the large-cap U.S. stocks of the S&P 500 has been about 12.1%. As you can see from the above table, the market typically delivered a return that was in line with, or exceeded, the long-term average in the years following the start of a rate-cutting cycle. There were, however, a few obvious contradictions to that statement. The cutting cycles in both 2001 and 2007 were closely followed by sharply negative returns. In both instances, the onset of a recession closely followed the initial interest rate cut of the cycle.
A key objective of the Fed is to engineer a so-called ‘soft landing,’ where inflation returns to the Fed’s 2% target without the economy sliding into a recession. It’s too early to tell if they will be successful in this endeavor. If they are, in fact, successful, history shows that rate cuts could ultimately be a positive tailwind for stocks in the next couple of years.
Week in Review
- The Producer Price Index (PPI), which measures the change in prices that manufacturers pay their suppliers, was unchanged for the month of September and up 1.8% year-over-year, providing more evidence of continued easing in inflation. Core PPI, which excludes food and energy, was up 0.2% in the month and 2.8% year-over-year, meeting analyst expectations.
- Applications for unemployment benefits in the U.S. rose by 33,000 to 258,000 for the week ending October 5th, which is the highest level since August of 2023. While not a welcome sign for the labor market, this is more than likely temporary, as the largest changes in claims arose from states impacted by Hurricane Helene or the Boeing Strike. In the near term, initial jobless claims will likely continue to be elevated from the ongoing effects of Hurricane Helene and Milton.
- Last week, the Bureau of Labor Statistics (BLS) provided an update on the Fed’s progress against inflation when it published the September Consumer Price Index (CPI). The data in September showed that CPI rose 0.2% in the month and 2.4% year-over-year, the lowest yearly number seen since February 2021. On the other hand, Core CPI, which strips out food and energy, rose 0.3% in September and 3.3% year-over-year, an increase from the 3.2% year-over-year number seen in August. September marks the first time in nearly 18 months that year-over-year Core CPI has increased from the prior month.
Hot Reads
Markets
- Inflation Rate Hit 2.4% in September, Topping Expectations; Jobless Claims Highest Since August 2023 (CNBC)
- Wholesale Prices Were Flat in September, Below Expectations (CNBC)
- The Federal Reserve May Have Pretty Much Just Hit its 2% Inflation Target (CNBC)
Investing
- A Staggering Amount of Wealth Creation (Ben Carlson)
- A Message from the Past – Thoughts on Nostalgia (Morgan Housel)
- American Retirement Preparedness Is Improving, But It’s Still Not Good Enough (Morningstar)
Other
- Chasing 3: In Season with Nebraska Football – Episode 5 – Rutgers (YouTube)
- This $10m U.S. Army Laser Melts Drones with $3 Beams (YouTube)
- Tiger Woods is a WIZARD from 50 Yards (YouTube)
Markets at a Glance
Source: Morningstar Direct.
Source: Morningstar Direct.
Source: Treasury.gov
Source: Treasury.gov
Source: FRED Database & ICE Benchmark Administration Limited (IBA)
Source: FRED Database & ICE Benchmark Administration Limited (IBA)
Economic Calendar
- Competition, Achiever, Relator, Analytical, Ideation
Josh Jenkins, CFA
Chief Investment Officer, Principal
Josh Jenkins is a Chief Investment Officer and Principal at Lutz Financial. He began his career in 2010. Josh leads the Investment Committee and specializes in assisting clients with portfolio construction, asset allocation, and investment risk management. He is also responsible for portfolio trading, research and thought leadership, and the division's analytics and operational efficiency. He lives in Omaha, NE.
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