“Falling rates are only a positive for equity valuations to a point,” said Wilson. “We’re passing the point.”
Consider the last rate cut, he said. When the Fed lowered rates for the first time in a decade on July 31, the S&P 500 dropped 1.1% and then continued to decline the following month. At Friday’s close just above 3,000, the equity benchmark wasn’t far from the level seen the day before the rate move.
But a second rate cut has tended to herald a more favorable reaction from stocks than the first, according to Ned Davis Research, which studied market performance and easing cycles in the past century.
Perhaps it’s because doubts about the Fed’s commitment ease, or liquidity from the first one works through the system. Whatever the reason, the Dow Jones Industrial Average has jumped an average 9.7% three months after the second cut.
“The good news for the bulls, from a historical perspective, is that a reduction next week would mean that a one-and-done cut is off the table,” Ed Clissold, chief U.S. strategist at Ned Davis, wrote in a note last week. “Two is better than one.”
To Kevin Miller, chief investment office at E-Valuator Funds, the Fed’s influence on the U.S. market has weakened after Chairman Jerome Powell started considering global developments in policy making.
“He doesn’t have to do something for the economy, but he does have to keep an eye on what’s happening globally and stay somewhere in line with where global rates are,” he said. “I don’t see a huge sell-off in the market if they lower by a quarter. Likewise, I don’t see a huge gain. It’s going to be more driven by what we’re hearing on a potential trade agreement” between the U.S. and China, he added.
This article was provided by Bloomberg News.