„Something has happened again!"

"Something has happend again!" - This is how almost all Brenner novels by Wolf Haas begin, and this thought ran through my mind when I learned by how much the American Federal Reserve reduced its key interest rates on September 18 – namely by 50 basis points. At the end of June, there was speculation about an initial rate cut of 25 basis points after the presidential election. A month later, capital markets started pricing in a September rate cut, but still only by 25 basis points (source: Bloomberg, as of September 27, 2024). By the time of the September decision, optimism about further rate cuts in the U.S. had grown, but the 50 basis point cut was not fully priced in and was somewhat surprising in this magnitude. What does this mean for the markets?

As is the case when the Fed makes a surprising decision, the markets needed some time to digest it. Does the Fed perhaps know more than the market? Will the American Federal Reserve fail to achieve a soft landing (i.e., just a slowdown in growth and not an economic contraction in the U.S.)? On the day of the rate decision, the American stock market initially weakened, closing down 0.29% as measured by the S&P 500 (source: Bloomberg, as of September 27, 2024). Three days later, the S&P 500 was over 100 points higher, representing a gain of 2.19% (source: Bloomberg, as of September 27, 2024). Incidentally, last week we also saw a new all-time high in the S&P 500 (source: Bloomberg, as of September 27, 2024).

Rate cut cycles are often positive for stocks

Regardless of the magnitude, it is clear: the cycle of rate hikes has ended, and since September 18, we are in an environment of falling interest rates. Looking at all 12 rate cut cycles in the U.S. since 1970, one finds that in almost all cycles, the stock markets, as measured by the S&P 500 (including dividends), have increased, averaging 20.99% (source: Ned Davis Research, as of September 27, 2024). Only one cycle shows a negative return, namely the one at the beginning of the millennium. However, it should not be forgotten that at that time the stock markets were heavily burdened by the bursting of the tech bubble and the terrorist attacks of September 11, 2001. A similar return pattern can be observed for gold, although the returns are lower: the average is only 11.19% (source: Ned Davis Research, as of September 27, 2024). Furthermore, gold returns are negative in not one, but three rate cut cycles in total (source: Ned Davis Research, as of September 27, 2024).

The rate cut of 50 basis points once again demonstrated that the Fed reacts more quickly and swiftly than the European Central Bank, which, although it reduced interest rates ahead of the Fed in June, took no further action in July and waited until September to also cut rates by 50 basis points on September 12. In the U.S., another 75 basis points in rate cuts are priced in by year-end, while in Europe only a further 50 basis points are expected (source: Bloomberg, as of September 27, 2024). The difference in key interest rates between the U.S. and the Eurozone will likely narrow by year-end and continue to do so over the next year.

Decisive action

The Fed’s actions show how determined the American central bank is to act in a timely manner to prevent a potential recession and enable a soft landing. It has already achieved an initial success: the inversion of the American yield curve has been reversed. An inverted yield curve means that short-term yields on U.S. government bonds with a maturity of two years are higher than the yields on ten-year government bonds. Since September 6, the yield curve is no longer inverted. Yields on ten-year bonds are again higher than those on two-year bonds, which has not been the case since July 5, 2022. Investors are once again being compensated for holding longer-term bonds. In the past, an inverted yield curve in the U.S. was often an indicator of an impending recession, and this indicator has now disappeared.

In summary, from our perspective: The Fed is responding to the emerging economic slowdown with a bold rate cut. Stock markets are reacting positively, but not euphorically. A recession cannot be ruled out, but in our view, it is unlikely.

Diese Information stellt eine Marktübersicht und die Marktmeinung der Kathrein dar. Sie stellt keine Finanzanalyse dar und beinhaltet keine direkte oder indirekte Empfehlung für den Kauf oder Verkauf von Wertpapieren oder einer Anlagestrategie. 

Bei der Anlage in Wertpapiere sind Kursschwankungen und somit auch Kapitalverluste jederzeit möglich. 

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