In this episode of “Investment Management Foundations,” Aya Yoshioka, Portfolio Consulting Director at Wealth Enhancement, explains what the Fed’s interest rate cut on September 18, 2024 could mean for investors. 

VIDEO TRANSCRIPT BELOW

Welcome to today's edition of “Investment Management Foundations.” My name is Aya Yoshioka, Portfolio Consulting Director and Senior Investment Strategist here at Wealth Enhancement. It's October of 2024, and the Fed cut interest rates by 50 basis points—or half a percent—at their most recent meeting on September 18, 2024. In 2024, we have seen inflation trend back down towards the 2% target, and we have witnessed some softening in labor markets. The Fed has a dual mandate of maintaining price stability and maximum employment. With the recent softening in the labor market, the Fed believes that the upside risk to unemployment is greater than the upside risk to inflation. Thus, the Fed will continue to look to reduce interest rates at upcoming meetings, but the magnitude and the pace of cuts will depend on the economic data that we get in the coming months.

With that, we thought it would be helpful to take a look at history and see how equity markets have performed after the Fed began cutting interest rates. In this chart, you can see that the last 14 Fed rate cut cycles since 1929 have been pretty positive for equity markets. We present this with the caveat of past performance is not indicative of future returns. But you can see that most of the time, the S&P 500 posted positive returns 12 months after the initial Fed rate cut. The two negative periods seen here may resonate with you, just given that they were in the more recent time frames. But today's market and economy are different than what we've seen in those prior time frames. We know that in 2001, it was following the tech bubble bursting, and in 2007, this was prior to the great financial crisis. The tech companies that make up the S&P 500 now have much more solid cash flows, and valuations aren't as stretched as they were in 2000. That’s not to say they're not expensive, but they're just not as stretched as they were back then. Additionally, this time around, households and corporate balance sheets are in much better shape as borrowers locked in ultra-low rates that were characteristic of the decade prior to the pandemic.

Looking at this next slide, this is why we've seen some bouts of volatility though this year. Despite the fact that markets are higher when we get data, especially around the labor markets, market participants are battling it out in terms of trying to figure out, are we going into a recession? Is the labor market softening too quickly? And the debate has been raging on for almost two years. Markets worry about softening labor markets, but with the unemployment rate of 4.2%, this rate is still relatively low, and it isn't accelerating at an alarming rate. It’s important to note that companies reduce headcount when their outlook for sales deteriorates, and their outlook has to be in this three-to-six-month timeframe in order to really make that decision. This time around, the Fed seems to be getting in front of some of the issues in terms of the softening labor market and attempting to avoid a recession, which should be good for markets, as you can see in this chart.

Thank you again for watching today's video, and please tune in for our next episode of “Investment Management Foundations” from Wealth Enhancement.

This information is not intended as a recommendation. The opinions are subject to change at any time and no forecasts can be guaranteed. Investment decisions should always be made based on an investor's specific circumstances. Investing involves risk, including possible loss of principal.

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