Uriel Loredo

The wait is over. After four years, the Federal Reserve has cut its benchmark rate by 50 base points, bringing it to a range of 4.75% to 5.00%. This move could signal a new direction for markets in the coming months. However, for investors with a long-term strategy, these events are only part of the noise.

Here’s a look at the historical performance of markets following the first rate cut:

• Positive performance in the past: Since 1974, the S&P 500 has shown positive returns 80% of the time in the 12 months following the first rate cut, with an average return of 15%. Over three years, the average return is 12%.
• Caution in recession scenarios: If the rate cut is accompanied by a recession, as happened in 2001, 2007, and 2019, the S&P 500 fell by an average of 8% in the following 12 months. Over three years, it remained stable.
• More optimistic scenario: In an environment of rate cuts without a recession, markets have generated an average return of 22% in the first 12 months and 15% over three years.

In summary, while there is still debate about whether we will see a recession, it’s important to remember that extending your investment horizon increases the probability of achieving your goals.

Future Returns of the S&P 500 After a Rate Cut

• Past performance does not guarantee future results.

Source: Morningstar

Future Returns of the S&P 500 After a Rate Cut + Recession

• The data excludes easing cycles in 1974, 1980, and 1981, as recessions were already underway when the Fed made the first cut. Past performance does not guarantee future results.

Source: Morningstar

With inflation figures moving closer to the target and a noticeable slowdown in job growth, the Federal Reserve (Fed) decided to lower the benchmark interest rate by 50 basis points (bps). This significant move had not been seen since the emergency rate cuts during the COVID-19 pandemic in 2020. Outside of those emergency situations, the last time the Fed made a cut of this size was in 2008 during the global financial crisis. The market had expected this decision, though there was some debate over whether the cut would be 25 or 50 bps. As a result of this change, the federal funds rate range is now 4.75–5.0%. 

The Fed’s statement noted that recent indicators show the economy continues to grow at a steady pace. Job growth has slowed, and the unemployment rate has inched up slightly but remains low overall. Inflation is progressing toward the Fed’s 2% target but remains somewhat elevated. In the future, when considering rate adjustments, the Fed will carefully assess incoming economic data, evolving conditions, and the overall balance of risks. 

Additionally, the Fed updated its economic forecasts, making some adjustments for the remainder of this year and next year. They now expect the federal funds rate to average around 4.4% by the end of 2024, down from the 5.1% projected in June, suggesting another potential 50 bps cut. By 2025, they project the rate to be around 3.4%, lower than the previously estimated 4.1%. Economic growth expectations remain steady, near 2% for this year and 2025. However, the unemployment rate forecast has been revised up to 4.4% (currently at 4.2%) from the 4% estimated in June. For 2025, the unemployment rate is expected to stay at this level. 

Finally, the core inflation forecast (excluding volatile items like food and energy), measured by the Core PCE, is expected to decline to 2.6%, down from the previous estimate of 2.8%, and to reach 2.2% by the end of next year. 

Update of FED Indicators (September vs. June)

Source: Federal Reserve

We know that September has historically been a challenging month for the markets. While this month tends to be tricky, understanding the reasons behind this trend will allow you to be better prepared. Here are some key insights: 

• Market Seasonality: September has proven to be the weakest month for the stock market. Since 1928, the S&P 500 has averaged a performance of -1.2%, closing with gains only 44.3% of the time. 
• Portfolio Rebalancing: With the year approaching its end, many institutional investors adjust their portfolios, which can increase selling pressure. 
• Post-Vacation Volatility: The return of traders after summer often brings increased volatility. 
• Economic Data and Geopolitics:  This month, significant economic data and monetary policy decisions are expected to influence market sensitivity. Moreover, geopolitical tensions remain present, adding uncertainty.  

In a nutshell, while September can be volatile, staying informed will help us navigate with greater confidence. 

We encourage you to continue monitoring the market and preparing for any scenario. 

Historical monthly average performance 

DJIA – Dow Jones (1897), S&P 500 (1928), Nasdaq (1971) y Russell 2000 (1987) 

Source: Marketwatch – Dow Jones Market Data 

Discover the main conclusions from recent market movements and how they might impact on your investments.

August presented us with a rollercoaster in the markets, starting with an initial correction followed by a fast recovery. However, behind this volatility lie important signals we need to consider:

Soft landing on the horizon:

• The economy continues to show strength, but with signs of slowing down, particularly in the labor market. Nonetheless, the economy is not at risk of significant deterioration. A soft landing remains the most likely scenario.

Fed preparing to cut rates:

• With economic growth moderating, inflation decreasing, and the labor market cooling, it’s likely that the Fed will reduce interest rates by 25 base points at its next meeting on September 16.

Solid Corporate Earnings but with Challenges:

• S&P 500 companies reported strong earnings for the second quarter (+8% year-over-year), with interesting growth beyond the “Magnificent 7” (+4.6% year-over-year excluding this block of companies) for the first time in five quarters, but future prospects have moderated.

Volatility Ahead:

• Negative seasonality, economic and geopolitical uncertainty, as well as upcoming elections, could increase volatility in the markets.

How can you navigate this volatile environment?

Maintaining a long-term investment strategy is crucial to overcome market storms.

Stay informed: This is the survey outlook for the upcoming US elections

Source: RealClearPolitics

Let’s understand market corrections and why they happen.

A market correction is defined as a decline of 5-10% in a bull market. Although these events may seem like a sudden storm, they are a natural part of market cycles.

Corrections can be triggered by various factors, from geopolitical tensions to disappointing corporate reports. These adjustments allow asset prices to align with their true values and prevent the formation of bubbles, while also offering new opportunities for investors.

How can you effectively navigate a market correction?

• Stick to your investment plan: Ensure your actions align with your financial goals, risk tolerance, and investment horizon.

• Diversify your portfolio: A diversified portfolio can help mitigate the risks associated with corrections. Spreading your investments across different asset types reduces exposure to market fluctuations.

• Stay informed and avoid panic: While it’s important to stay updated on market news, don’t let sensational headlines affect you. Keep calm and focus on your long-term goals.

In a nutshell…

Panic selling that may arise from a correction, along with the potential loss from not investing on the market’s best days, has significantly impacted investor performance over the past 50 years.

Panic selling can weigh on the long-term performance of a portfolio.

Source: Raymond James – Juliusbaer