As the Federal Reserve marks the first anniversary of a pause in rate hikes, Strategas analysts caution against the optimism surrounding potential rate cuts.
According to their recent note, "the market tends to perform much better during the period between the last hike in a Fed tightening cycle and the first cut in rates than it does after the first cut in the Fed Funds rate."
The mixed signals about the economy's health, highlighted by cracks among consumers, have been noted by the firm's Chief Economist. He observes that "those cracks are becoming more obvious."
Fed Chair Powell appears inclined towards easing, but Strategas warns that Fed easing is typically linked with economic and market stress.
Historically, "the market bottoms 213 days later and 23% lower after the first Fed cut in a series of rate cuts," with S&P 500 operating earnings declining by about 10% on average in the 12 months following the first easing, said Strategas.
While the Fed has so far managed a "perfect soft-landing," Strategas believes credit must be given to their efforts.
However, the note emphasizes, "be careful what you wish for when it comes to an easing of monetary policy."
"There is, naturally, a chance, broadly supported by recent policy, that policymakers have decided to effectively “outlaw” recessions," adds the firm. "While it seems appealing, such an approach makes it difficult to control inflation."
This is particularly pertinent given the uncertainty surrounding President Biden's decision not to seek reelection, which Strategeas says might affect his administration's urgency in providing economic stimulus leading up to the election.
In summary, Strategas analysts advise caution, highlighting that while a rate cut might seem beneficial, it often signals deeper economic issues and could lead to significant market declines and earnings reductions.
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