As the Fed gears up for interest rate cuts in September, experts caution that the impact on stocks will depend on the looming threat of recession.
Global markets are bracing for the U.S. Federal Reserve’s anticipated interest rate cuts in September. However, experts warn that a rate cut doesn’t always spell good news for stocks. If a recession is on the horizon, stocks may see a temporary boost after the first cut, but they tend to lose value as the economy contracts. On the other hand, if a recession is avoided, stocks could outperform bonds in the long run.
Andrea Cicione, Head of GlobalData Research at TS Lombard, emphasized that the impact of the Fed’s rate cuts is closely tied to recession expectations. According to a report from MarketWatch, while stocks typically rise immediately following a rate cut, they often decline in the ensuing weeks if the economy shows signs of contraction. Cicione’s team studied the performance of the S&P 500 from 1984 to 2019 during past Fed rate cut cycles and found that if a recession is averted, stocks tend to rally after the initial rate cut.
Amid growing fears of a U.S. recession, last week’s “Black Monday” saw global stock markets tumble after a sudden end to the yen “carry trade” by investors. The weak July jobs report further fueled concerns about the U.S. economy slipping into recession.
Cicione also pointed out that while stocks may struggle during a recession, bonds typically perform better. The yield on the 10-year Treasury note dropped to 3.78%, its lowest level of the year, before climbing back to 3.94% later in the week. If a recession is avoided, stocks are expected to outperform bonds in the long run.
Source: Dunya.com / Prepared by Irem Yildiz