Fed Cut Rates by 50 Basis Points

• First cut in 4 years, marking the beginning of the easing cycle

• Rate cuts can precede market declines

Deja-vu?

18 September 2007, 50 bps rate cuts

18 September 2024, 50 bps rate cuts

After the most aggressive tightening cycle in 40 years and the second-longest pause in history with rates in negative territory, the Fed cut its policy rate for the first time in four years.

However, does that half percentage point trim signal problems?

Historically, the Fed began initiating 50 basis points three times, in early 2001 and 2007 and  2020

Stock markets were sliding as the tech bubble began to deflate with the Fed cut rates in January 2001 by 50 basis points. The bursting of a subprime mortgage-credit bubble in August 2007 preceded the Fed’s cut of the same magnitude in September 2007.

And of course at the onset of the COVID-19 pandemic in March 2020 Fed also cut by 0.5% to save the economy of markets from total collapse.

Source: pin point macro

All this has led market participants to think there might be some truth to that statement.

The parallels are there.

Markets initially went higher, just like they did yesterday, cheering on the big rate cut, but over the next months experienced deep declines.

In 2001, SP500 was down 16% post the 1^st rate cut, while in 2007 it was nearly double that at a negative 27%.

During the Dot.com bubble, the market fell 31% after 2 years and in 2007 during the “Great financial crisis” the market fell 26% after 2 years.

Another critical factor is the state of the economy.

Here is a chart that shows how the SP 500 does when the Fed cuts in a non-recession period (black line) vs. a recession period (green line).

Massive difference!

Source: HSBC

It all depends on if we get the soft landing (no-recession) or hard landing (recession) scenario.

And your timeframe. Initially, markets seem to rejoice about the rate cuts, but they follow a rude awakening, especially when the economy starts heading south.

Will history repeat itself, or is this time different?

Investors can long SP 500 using our  5x SP 500.

Alternatively, traders can short the SP 500 using our  -5x SP 500.