- Probabilities favor an equity rally post FOMC rate cut
- Defensive sectors outperform in first three months after non-recessionary cut
- USD headwind for stocks to fade with cut
As just about anyone who isn’t living under a rock expects, the U.S. Federal Reserve Board is set to cut the Fed funds rate next Wednesday (for more on this see page 6). My anecdotal sense in talking with clients is that they are focusing on the last two rate cycles (2001 and 2007) and therefore see these cuts as both a negative signal and of limited benefit for stocks.
The bears need to refocus on the circumstances surrounding this cut. I’ve previously published multiple studies showing that stocks see positive gains every time the Fed cuts (100% of time, when LEIs positive). Consider the mechanisms.
The strong greenback has been a headwind for Corporate America and its EPS growth since 2018 (taking perhaps 5%-6% off the top-line). Consequently, a Fed cut should let the USD weaken. Moreover, because of either a shortage of USD or an oversupply of short-term Treasures, the Fed Funds rate is now higher than the IOER (interest on excess reserves). The Fed has intended to keep the funds rate below IOER, but in the past three months, the former has moved above this.Finally, lowering...