From Morningstar: 2024-09-19 10:01:00

The Federal Reserve made the first rate cut in over four years, setting the benchmark interest rate at 4.75% to 5.00%, a half-point drop. The market had anticipated the move, adjusting asset prices accordingly. Small-cap stocks surged in July in anticipation, and the 30-year mortgage rate fell from 7% to 6.2%.

Stocks have historically performed well in the 12 months post-rate cut, with a positive return 80% of the time and an average return of 15%. However, if a recession hits, returns are positive only 33% of the time, with an average return of negative 8%. When the Fed cuts rates without a recession, stocks have positive returns every time with an average return of 22% one year later.

Financial advisors analyze subtle changes in Fed press conference language to position portfolios. The markets react differently to rate cuts depending on whether a recession occurs. Lower-income consumer financial strain may signal economic troubles, while top companies invest heavily in AI, suggesting economic stability. The Fed’s aggressive 50-basis-point cut may lead to concerns about the economy.



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