Investing in the Rate-Cutting Cycle: Confidence and Caution

The capital markets are facing an exciting year in 2025. Not only will the outcome of the US elections be decisive, but also how the US Federal Reserve (Fed) and the European Central Bank (ECB) react to economic changes. Currently, the markets are optimistic: the Purchasing Managers’ Indices (PMIs) in the US are overall above 50, indicating growth (source: NDR Research, as of 10/2/2024). While the service sector is flourishing, the manufacturing sector, especially in Europe, remains under pressure. However, corporate profit expectations for next year are pointing upwards in the US. The probability of a recession in the US remains low—the inversion of the yield curve has dissipated after two years. Another encouraging signal is the decrease in inflation. By autumn 2025, inflation is expected to be 2% in the Eurozone and 2.2% in the US (source: NDR Research, as of 10/2/2024).

Decisions of the Fed and Their Impacts The recent surprising rate cut by the Fed by 50 basis points shows the decisive action of the US central bank to dispel recession fears. The rate-cutting cycle has begun, which in the past often had positive effects on the stock markets. Since 1970, US stock markets have risen in 11 out of 12 rate-cutting cycles (source: NDR Research, as of 10/2/2024). The presidential elections might cause short-term uncertainties. Historically, however, monetary and fiscal policies have had a greater impact on the stock market than which party wins. Stable monetary policy could strengthen investor confidence, regardless of who enters the White House. However, the enormous budget deficit of the US could become a problem in the medium term.

Uncertainties Due to Political Tensions If anything could negatively affect the markets, it would be exogenous factors such as the Middle East conflict, which could have an impact on oil prices. A rise in oil prices due to a war in the Middle East could rekindle inflation and put pressure on the stock markets. The US elections could bring a close result, and possible disputes over the election outcome—especially if Trump does not concede a potential defeat—could lead to market turbulence.

Europe and China in a Dilemma Compared to the US, Europe lags in economic development. Lower valuations of European stocks might present an investment opportunity but often have good reasons. One needs to look closely before buying seemingly “cheap” stocks. Germany—Europe’s largest economy—is in a recession. Many large companies in Europe are strongly dependent on the economy, and the AI story has few protagonists in Europe. The difference in interest rates between the US and the Eurozone is expected to decrease by the end of the year, and this trend will likely continue into next year. Whether the economic boost recently ignited by China can sustainably stimulate the markets remains to be seen. Structural problems will not be solved by it.

Cautious Optimism and Vigilance A recession in the US is not on the horizon, and corporate profit expectations are optimistic. Additionally, historically, the US stock market (measured by the S&P 500) has risen by more than 20% in rate-cutting cycles (source: NDR Research, as of 9/29/2024). This points to a positive environment for stocks up to the end of the year and beyond. Despite all the positive signals, investors should not ignore geopolitical uncertainties. The possible political turmoil in the US should, if at all, only captivate the markets in the short term.

This information provides a general overview of current market data and interest rate developments as well as market opinion; it is not a direct or indirect recommendation for a particular investment strategy in terms of financial analysis. When investing in securities, price fluctuations due to market changes are always possible. Past performance is not a reliable indicator of future results.