The weak U.S. CPI data for June added fuel to the Fed's expectations of a rate cut. However, the market still faces multiple negative catalysts: multiple potential geopolitical conflicts, unsustainable U.S. fiscal conditions, and uncertainty about the 2024 U.S. election.
The world is setting their models around the prospect that the Federal Reserve will cut interest rates this year. But we shouldn’t be too confident that this will be the case. Rate cuts don’t mean that U.S. stocks will surge. In fact, if history is any guide, they may indicate the exact opposite.
Although U.S. stock investors are looking forward to interest rate cuts and a number of economic data are seen as positive for rate cuts, in fact, they may instead be warning bells that the market is preparing for a sharp drop.
As shown in the above and below figures, the bottom of the U.S. stock market usually occurs after the Federal Reserve cuts interest rates, which usually takes 18 to 24 months.
Don’t let rate cuts be the only signal that the market may plunge. Behind the scenes, there is a mountain of macroeconomic data piling up like a pileup on a highway.
Major cracks are showing in the regional banking and commercial real estate sectors, consumers have run out of purchasing power, as evidenced by recent earnings reports from retail companies, and the unemployment rate has now risen to 4.1%, the highest point since November 2021.
According to the New York Fed, more people maxed out their credit cards in 2024 than in 2023. The New York Fed's latest report shows that household debt increased by $184 billion in the first quarter of 2024, and credit card balances decreased by $14 billion, which is a normal seasonal phenomenon. However, credit card default rates are rising, and 18% of borrowers have used at least 90% of their credit limits, indicating that the proportion of credit card maxing out is increasing.
Debt defaults indicate that borrowers are unable to meet their repayment obligations. The most immediate impact is that financial institutions that issued these debts may experience liquidity constraints as part of their expected income is interrupted. In an environment of rising default rates, lenders will naturally become more cautious, tightening lending standards or raising interest rates to offset the higher risk. This may not only suppress entrepreneurial activity, but also reduce consumer spending as individuals and businesses find it more difficult to obtain credit.
When consumers spend less, companies see revenue and profits fall, making them less attractive investments. Lower earnings can cause stock prices to fall.
If history is any guide, stocks will fall, not rise. Only in the quarters or years following a rate cut will the market likely find its bottom. That's why rate cuts shouldn't be viewed as a simple signal to buy stocks right away.
The article is forwarded from: Jinshi Data
