A blunt message for those asking what Fed rate cuts mean for stocks ✂️

'This is not the right question to ask' 🤔

Photo by Kenny Eliason on Unsplash

Many investors want to know what the Federal Reserve’s first rate cut since 2020 might mean for the stock market.

Savita Subramanian, BofA’s head of U.S. equity and quantitative strategy, has a blunt answer. From her Sept. 20 note to clients (emphasis added):

Q: Do I buy or sell the first Fed rate cut?

A: This is not the right question to ask, in our view. Every easing cycle is different. The first Fed rate cuts in prior easing cycles are not entirely analogous to today. Prior to the mid '90s, the FOMC did not announce policy changes, and from the late 1970s-1980s, the Fed didn't explicitly target the Federal Funds rate. Average returns across recessionary and non-recessionary easing cycles are meaningless. For US equity returns, policy moves take a backseat to the scarcity or abundance of corporate profits.

There’s a lot of great work out there dissecting the history of the Fed’s monetary policy decisions and what followed in the markets. The historical context is informative.

But most of the research separates the historical outcomes based on the direction of economic growth, showing that markets tend to perform better when rate cuts aren’t followed by a recession. To me, this suggests there may be more important things moving markets than Fed policy decisions alone.

This echoes the message of the Jan. 28 TKer: Whether or not the Fed cuts rates is not the right question.

Lessons from when the first rate cut was delayed 📆