By Chris Konstantinos, CFA, Managing Partner, Chief Investment Strategist
SUMMARY
- Rate cuts tend to be good for S&P 500 future returns.
- Recession risk remains relatively low, in our view, with employment normalizing.
- We view this as a ‘Goldilocks’ scenario for stocks.
We are excited to release our "October 2024 Chart Pack,":https://www.riverfrontig.com/insights/riverfront-quarterly-chart-pack-oct-2024/ our visual quarterly designed to walk investors through what’s happening in markets and why, what may come next, and how we are positioning RiverFront portfolios. In today’s Weekly View, we picked three visuals from the Chart Pack to highlight.
The Federal Reserve (‘Fed’) commenced cutting interest rates with a 50 basis point cut (basis point = 1/100th of 1%) in September, with Jay Powell and co. demonstrating optimism that inflation is under control. Our historical analysis of sixteen rate-cutting cycles starting in the 1950s (Chart 1, below) suggests the subsequent couple of years after the first rate cut tend to be positive for stocks… particularly if the economy can stay out of recession over the following year (green line, Chart 1).
We believe that "US ‘Economic Exceptionalism’":https://www.riverfrontig.com/insights/american-economic-exceptionalism/ is alive and well, and that the current economic expansion is durable. This is evidenced, in our view, by the resiliency shown in Purchasing Manager Index (PMI) surveys (Chart 2, below). While much has been made about recent rise in continuing jobless claims (blue line on Chart 3, below), we believe this simply represents a normalization back closer to historical averages (yellow line, Chart 3) after the unusually tight job market of the last few years. We view this backdrop of rate cuts into an expanding economy as a ‘Goldilocks’ scenario for stocks. Our asset allocation portfolios remain overweight stocks, with an emphasis on the US.
CHART 1: RATE CUTS TEND TO BE GOOD FOR U.S. STOCKS
CHART 2: RECESSION RISK REMAINS LOW, IN OUR VIEW; PMI SURVEY SUGGESTS ECONOMIC EXPANSION
CHART 3: WE BELIEVE EMPLOYMENT IS NORMALIZING… NOT COLLAPSING
Originally published October 15, 2024
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Risk Discussion: All investments in securities, including the strategies discussed above, include a risk of loss of principal (invested amount) and any profits that have not been realized. Markets fluctuate substantially over time, and have experienced increased volatility in recent years due to global and domestic economic events. Performance of any investment is not guaranteed. In a rising interest rate environment, the value of fixed-income securities generally declines. Diversification does not guarantee a profit or protect against a loss. Investments in international and emerging markets securities include exposure to risks such as currency fluctuations, foreign taxes and regulations, and the potential for illiquid markets and political instability. Please see the end of this publication for more disclosures.
