It’s one of the top questions on investors’ minds: when will the Federal Reserve (the Fed) ease up on the rate hikes and pivot to easier monetary policy? This chart suggests potential good news for Team Pivot.
See, historically, when the US two-year Treasury yield (blue line) has crossed below the benchmark federal funds rate (white line) for the first time during a rate hike cycle, it’s been followed by an interest rate cut. And that’s just happened. What’s more, the one-year Treasury notes are yielding significantly more than the two-year notes – and historically, that’s signaled that a rate cut is not far off.
What’s unclear now is whether history will soon repeat itself, or whether the economic conditions today will lead to a different outcome. This week’s announcement from the Fed could shed some light on all that.
A less aggressive (less hike-inclined) Fed would give a boost to stocks, at a time when they appear to need it. Just look at the earnings we’ve seen so far: 29% of S&P 500 companies have reported results for the fourth quarter. Of those, 69% have beaten earnings estimates, which is weak compared to the five-year average of 77%. On average, companies are beating earnings estimates by 1.5%, which is far below the five-year average of 8.6%.
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