Not everyone is convinced the Fed will start cutting rates in September. Pat Reilly, senior director of Americas analytics at FactSet, said the recent wave of U.S. economic data supports a rate cut but does not "demand" one.
He also believes that cutting rates before the election could lead to accusations of politicization, although policymakers could argue that not making the necessary rate cuts before the election would be a more serious stab in the back of the Fed's independence.
By comparison, the market sees a 96% chance that the Fed will cut rates in September, according to CME's FedWatch tool. It is also widely believed that a rate cut would provide fresh impetus for the rally in U.S. stocks.
To better gauge where the stock market will go after the Fed’s first rate cut, Donald Hagan, chief investment strategist and co-founder of Day Hagan Asset Management in Florida, looked at the 17 first rate cuts since 1957.
Of course, the market’s reaction is usually positive. The S&P 500 (SPX) has risen an average of 14% in the year following the Fed’s first rate cut, according to Ned Davis Research.
However, as can be seen in the chart below, the reason for the stock market's rise was that investors bid up corporate valuations (green line) after the Fed's first rate cut.
"With U.S. stock valuations already at the high end of their historical range, continued valuation expansion may not save the situation, and it will ultimately depend on company earnings," Hagen said.
Expectations have also risen, he noted: Leaving aside the second-quarter earnings data that are starting to come in, the median S&P 500 earnings forecast is for growth of 19% in the third quarter, 21% this year and another 18% next year.
Is that possible? Hagen's answer: Absolutely. He said consumer credit conditions are favorable. But he also pointed out that even McDonald's (MCD) has noticed cost-conscious customers, and Amazon (AMZN) has shown that customers are bargain hunting and looking for deals.
Hagen is perhaps a little more positive about the stock market than his comments suggest. He believes that the current uptrend in stocks remains intact. Broader models of U.S. and international economic growth, inflation trends, liquidity and demand for stocks are still sending optimistic signals. Hagen also added that if his models turn bearish, he will choose to hoard cash.
The article is forwarded from: Jinshi Data
