Here’s What Happens After A Fed “Pivot”

Here’s What Happens After A Fed “Pivot”
Stéphane Renevier, CFA

about 1 year ago1 min

Mentioned in story

Many investors are primed and hoping for a Fed pivot – the moment when the Federal Reserve shifts from aggressively raising interest rates to actually lowering them. They’re expecting it to be the catalyst for rocketing stock gains. They might be disappointed.

As you can see in the chart, stocks have historically had a tough time following the first interest rate cut by the Fed. Not only did they experience pretty steep losses (y-axis), but they also took quite a while to find a bottom (x-axis). On average, the S&P 500 lost 23.5% after a rate cut and took 200 days to hit bottom. They sometimes lost less and sometimes recovered more quickly, but a Fed cut has never been very good news for stocks.

The reason is that when the Fed is cutting rates, it’s because the economy is struggling. And when the economy’s struggling, companies’ earnings and their valuations tend to be under pressure, which pushes their prices lower. And, sure, stocks are forward-looking and, by anticipating a recovery, they tend to bottom before the recession actually ends. But their forward-looking nature is also why they’re unlikely to bottom before a recession even starts, and as things are about to get worse.

So, yes, we might be closer to a Fed pivot. But, if we are, that also means we’re closer to an economic slowdown. And historically, that’s spelled trouble for stocks, so be careful what you wish for.



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