With the S&P 500 index trading not far from its all-time highs, the Federal Reserve Board yesterday cut its federal funds target and discount rates by 50 basis points. Since then, stocks have rallied sharply. Naturally, no small number of investors are wondering if it is time for them to wade in and join the party.
If history is any guide, the answer is no. That is because yesterday's events are not as bullish for stocks, in the short-term at least, as many seem to believe.
Based on data going back to 1971, the median one-week return for the S&P 500 following a Fed rate cut when the benchmark measure has been within 10% of its 52-week highs has been +0.91%. Four weeks after such a move, the return has been -0.64%. Not exactly a reason to get too excited.
What's more, when you narrow the range of possibilities somewhat, things look even less promising.
For example, not all of the past cuts have been precursors to similar follow-on moves. If the one-hit-wonders are eliminated from the equation, the median one-week and four-week returns over the past three decades are +0.12% and - 0.51%, respectively.
Or if you want to look at how things panned out for all rate cuts of 50 basis points (one-hundredth of a percent) or more (thus excluding smaller decreases), average returns were negative over the course of one and four weeks, at -0.32% and - 0.08%, respectively.
Finally, in those cases where the the Fed decreased rates by at least 50 basis points and there were one or more cuts to follow, the median return after one week was 0.52% and after four was 0.22%.
The point is, no matter which way you cut it (no pun intended, of course), yesterday's Federal Reserve action, coming as it does with the stock market trading very close to its 52-week (and all-time) highs, seems more a reason to be cautious than to dive in and run with the bulls.
Michael Panzner is a 25-year veteran of the global stock, bond, and currency markets and the author of Financial Armageddon: Protecting Your Future from Four Impending Catastrophes and The New Laws of the Stock Market Jungle.
Summary: Median returns following Federal Reserve cuts in the federal funds rate target where the S&P 500 index was within 10% of its 52-week highs
| |
Median one-week returns |
Median four-week returns |
|
After all cuts |
0.91% |
-0.64% |
|
Excluding one-hit-wonders |
0.12% |
-0.51% |
|
All cuts of at least 50 basis points |
-0.32% |
-0.08% |
|
Cuts of at least 50 bp, not including one-hit-wonders |
-0.52% |
0.22% |
Historical detail:
|
Date of rate cut |
At least one more afterwards? |
Size of cut |
Fed funds target rate after cut |
S&P 500 one-week return |
S&P 500 four-week return |
|
02-Jul-71 |
No |
-0.250% |
5.250% |
0.91% |
-4.21% |
|
01-Sep-71 |
Yes |
-0.625% |
5.125% |
2.29% |
-1.18% |
|
01-Jul-76 |
Yes |
-0.375% |
5.125% |
0.38% |
-0.64% |
|
03-Dec-79 |
No |
-1.500% |
14.000% |
1.74% |
1.99% |
|
29-Dec-80 |
No |
-2.000% |
18.000% |
2.18% |
-3.84% |
|
16-Jan-81 |
No |
-4.000% |
16.000% |
-3.37% |
-5.84% |
|
01-Jun-81 |
Yes |
-4.500% |
15.500% |
-0.13% |
-0.39% |
|
12-Oct-82 |
Yes |
-0.500% |
9.500% |
1.59% |
6.38% |
|
01-Sep-83 |
No |
-0.125% |
9.500% |
2.16% |
1.83% |
|
02-Oct-84 |
Yes |
-1.750% |
10.000% |
-1.17% |
1.99% |
|
29-Mar-85 |
Yes |
-0.500% |
8.500% |
-0.90% |
0.84% |
|
17-Dec-85 |
Yes |
-0.250% |
7.750% |
-1.67% |
-1.90% |
|
11-Jul-86 |
Yes |
-0.500% |
6.375% |
-2.42% |
-2.20% |
|
05-Jun-89 |
Yes |
-0.125% |
9.625% |
1.31% |
-0.87% |
|
06-Jul-95 |
Yes |
-0.250% |
5.750% |
1.27% |
0.86% |
|
18-Sep-07 |
??? |
-0.500% |
4.750% |
|
|
Closing Bell: Economic Catapult for Thanksgiving & Black Friday (WMT, TGT, GRMN, GOOG, MSFT)
Deere up on Q4 earnings performance
Reid Hoffman: LinkedIn will go public (at some point)
