09/23/2024 Market Strategy
- September 23, 2024
What a Difference a Rate Cut Makes
Last week’s 50-bp rate cut by the Fed sweetened stateside equity returns
Key Takeaways
- We’ve updated our maximum drawdowns table to show the market’s recovery on Thursday of last week from the 8.49% decline over the 20 days from July 16 to August 5.
- We discuss the likely size of the rate cuts at the November and December meetings, which we believe will be dependent on the incoming data flow leading up to those decisions.
- We continue to expect that small and midcap stocks could begin to experience more sustainable rallies now that the Fed has begun to cut its benchmark rate.
The S&P 500 begins this week at near-record levels. With the Fed having initiated its first benchmark interest rate cut since March of 2020 markets have greeted the decision favorably if not without some afterthought that caused stateside markets to give back a bit of their gains in Friday’s session.
For the week the Dow Jones Industrials, the S&P 500, the NASDAQ Composite, the S&P 400 (mid-caps), the S&P 600 (small Caps) and the Russell 2000 (small caps) posted respective gains of 1.62%, 1.4%, 1.5%, 2.3%, 2.2% and 2.1%.
From the end of August through last Friday the Dow Jones Industrials, the S&P 500, the NASDAQ Composite, the S&P 400 (mid-caps), the S&P 600 (small Caps) and the Russell 2000 (small caps) have posted respective gains of 1.2%, 1.00%, 1.3%. 0.4%, 0.2% and 0.5%.
Market reaction to the Fed’s action last week appeared quite normal with varied sentiments and opinions testing the decision in the days immediately following the announcement.
Where to From Here?
A modest wobble last week on the day of the Fed’s announcement (Wednesday) occurred as market participants pondered what the first cut might mean for the economy and what it might portend for stock prices. Thursday followed with what seemed like a broad-based celebration that drove the S&P 500 to its latest record high. Then on Friday the Dow Jones Industrial Average hit a new high.
From our perch on the market radar screen, market reaction to the Fed’s move last week appeared quite normal with varied sentiments and opinions testing the decision in the days immediately following the announcement.
A busy calendar of economic data this week along with results of seven companies reporting this week (ahead of when Q3 earnings season gets under way when the big banks begin reporting on October 11) should add to the market color in the day to day as market participants ponder and plot what comes next.
While we had expected the Fed to cut just 0.25% last Wednesday we surmise that the elements of economic weakness the latest Fed Beige Book had shown among the central bank’s 12 regions added to its commitment to the full employment part of its dual mandate in making its decision to cut 0.5%.
We continue to expect the Fed will cut rates further by another 25 bps in each of the November and December meetings if the incoming economic data warrant such moves.
We remain positive on equities and maintain our 5900 target price for the S&P 500 by year end.
Last week’s rate cuts could provide relief to the interest rate logjam that’s plagued the housing market as well as deliver some help to other areas in the economy that have been pressured by high rates such as commercial real estate, personal loans and small business activity.
In our view, small and mid-cap stocks, which have seen interim rallies since last year on expectations of the Fed cutting rates, could benefit from a lower interest rate regime now that the Fed has begun to cut rates.
We believe it’s important to keep expectations right sized in an environment of economic transition to a new normal in rates.
Notwithstanding election year nervousness on policies intimated by either Presidential candidate as well as increased geopolitical risk in the Middle East and Asia, the S&P 500’s closing price last Friday of 5713.64 suggests to us that the market, bolstered by economic resilience and a friendlier Fed, may want to move higher.
John Stoltzfus
Title:Chief Investment Strategist, Oppenheimer Asset Management Inc.
John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.
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