The Fed Cut Rates. What’s Next for the Markets?
“Are we there yet?”? This question is heard frequently on summer road trips. From the backseat, children eagerly await the vacation planned for them but may struggle to understand how long the trip will take, and then grow impatient when it takes longer than expected. Parents in the driver seat may also be uncertain about the timing of their arrival as they navigate detours and changing road conditions.
This summer we’ve also seen the markets anticipating a new destination: a cut to interest rates by the Fed to help prolong the economic expansion. Last week the Fed did as expected and lowered the range of its benchmark interest rates to 2.0% -2.25% from 2.25% -2.5% to help offset rising uncertainties from too-low inflation, U.S. China trade tensions, and slowing global growth.
Yet, in a press conference after the rate announcement, the Fed chairman indicated that future rate cuts were unlikely this year.? In effect, the Fed stated that the destination towards lower rates had been reached, and, like an irritable backseat driver, the markets showed their disapproval for the direction the Fed had taken by falling 1% the day of the press conference.? These losses extended throughout the week as a detour appeared in the market’s path: another round of tariffs on Chinese imports announced by the White House.? With new uncertainties emerging on the Fed’s next steps, investors are again asking, “Are we there yet?”
While the timing of future interest rate moves is unknown at this time, we think the economy continues to move in the right direction for three reasons.?
|??????????????????????? S&P 500 total returns
|First Rate Cut
||?? 6 months later
||1 year later
Source: FactSet, Morningstar Direct, Edward Jones calculations
?Nela Richardson, PhD
Source: 1. Bloomberg
|Dow Jones Industrial Average||26,485||-2.6%||13.5%|
|S&P 500 Index||2,932||-3.1%||17.0%|
|10-yr Treasury Yield||1.84%||-0.23%||-0.84%|
Source: Bloomberg, 08/02/19. *5-day performance ending Friday. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results.
The Week Ahead
The earnings season will begin to wind down, with 13% of companies in the S&P 500 reporting second-quarter results. Economic news will also be light, with notable releases being the ISM non-manufacturing index reported on Monday and a fresh read on inflation Friday.
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