Wells Fargo: Taking history as a lesson, the Fed rate cut marks the beginning of a major drop in US stocks
Data from the Investment Research Institute of Fuguo Bank shows that a rate cut by the Federal Reserve often leads to a significant decline in the S&P 500 index. Investors should not equate a rate cut with a signal for the stock market to let its guard down. Investors should pay attention to the reasons for the rate cut. If it is to adjust real interest rates to accommodate a decrease in inflation, the stock market may perform well. However, if it is in response to macroeconomic or market turmoil, the stock market performance may be affected. WFII expects the S&P 500 index to target between 5100-5300 points by the end of 2024 and between 5600-5800 points by the end of 2025
According to Zhītōng Finance, data from Wells Fargo Investment Institute (WFII) shows that despite investors "clamoring" for the Federal Reserve to start cutting interest rates, history indicates that the decline of the S&P 500 index may coincide with the start of an interest rate cutting cycle. WFII investment strategy analyst Austin Pickle outlined the returns of the S&P 500 index and the number of days between the Federal Reserve's first interest rate cut in a cycle and the subsequent low point of the index in a report on Monday. He found that since 1974, within 250 days after the first interest rate cut by the Federal Reserve, the index has experienced an average decline of about 20%. He stated, "In other words, investors should not equate the first interest rate cut with a signal of the stock market being on guard."
The Chicago Mercantile Exchange's Federal Reserve observation tool shows that traders in the federal funds futures market are pricing in a rate cut by the Federal Reserve in September. However, the latest dot plot released by the Federal Reserve last week indicates that policymakers expect to only cut the federal funds rate by 25 basis points to 5.25%-5.5% in 2024, i.e., one rate cut.
Pickle suggests that investors should focus on the reasons for the rate cut. He said, "If the Federal Reserve adjusts policy to realign real interest rates to accommodate continuously declining inflation, we believe the stock market may perform well within a tactical time frame, i.e., 6 to 18 months. However, on the other hand, if the Federal Reserve is forced to cut rates significantly to address macroeconomic or market turmoil, we expect the stock market performance to be affected."
Pickle pointed out that during the past five rate pause adjustment periods, the return rate of the S&P 500 index was "highest" at nearly 20%. He mentioned that the S&P 500 index rose by about 14% in 2024, and unfavorable factors including uncertain inflation paths may impact the return rate in the short term. WFII's year-end target for 2024 is 5100-5300 points, below the level of around 5473 points for the S&P 500 index on Monday.
However, Pickle stated that WFII's target for the S&P 500 index at the end of 2025 is 5600-5800 points, as the company believes that after a recent economic slowdown, inflation has been contained, U.S. economic growth is stable, supporting corporate profit growth and a rebound in the stock market