Rate Cut Minus Recession Equals More Market Gains

The next FOMC meeting is now less than a week away, and investors are extremely confident an interest rate is coming. The stock market has a history of mixed returns following Fed rate cuts, but rate cuts that happen when the U.S. economy is not in a recession have historically been a major bullish indicator for stock prices.

Market Expecting Cut

Every single time the Fed has cut rates during a period of U.S. economic expansion, the S&P 500 has delivered positive returns over the next 12 months. In fact the S&P 500 has averaged a 16.5% gain during those periods.

Investors are extremely confident they will get the magic combo of economic expansion and falling interest rates next week. The bond market is currently pricing in a 100% chance of at least a 0.25% rate cut next week and a 21.4% chance of a 0.5% cut, according to the CME Group FedWatch Tool.

Once interest rates start falling, the only thing that could rain on investors’ parade is the economy. The New York Fed’s recession probability index recently hit 32.9%, by far its highest level since the highest level since the last U.S. recession in 2009. The index suggests there is nearly a one-in-three chance of a U.S. economic recession within the next year.

The S&P 500 is already up 20.4% year to date to new all-time highs of 3,020. The index has already hit LPL Financial chief investment strategist John Lynch’s year-end target, but he said this week investors shouldn’t be dumping stocks just yet.

“Even though fundamentals may not justify the market going much above our 3,000 forecast on the S&P 500, with the Fed tailwind behind us, we’ll ride the wave for now,” Lynch wrote.

Golden Opportunity?

While an interest rate cut may be good news for stock investors, it could also be good news for gold investors.

“Low to negative rates suggest falling cost of holding gold at a time when elevated trade and geopolitical uncertainty strengthen the case for diversification,” UBS analyst Joni Teves recently said. UBS is calling for gold prices to rise from around $1,423 today to $1,450 by the end of the year.

Investors who expect a rate cut next week and believe the markets will follow their historical patterns should keep an eye on the SPDR S&P 500 ETF Trust SPY and the SPDR Gold Trust GLD.

Related Links:

Ray Dalio's 10-Year Bull Case For Gold

What To Expect From The S&P 500 Over The Next 20 Years