Do rate cuts mean stocks will go up?

A question from a subscriber about the impact of rate cuts by the Fed on stocks.

The answer is a bit more complex than a simple yes or no.

Since 1970, the market reactions to rate cuts have varied, with some periods showing positive impacts on the stock market and others less so.

In 1987 and 2001, the stock market actually declined after the first rate cut by the Fed. In 2000 and 2007-2008, significant market declines followed rate cuts as well.

The question shouldn’t be if the Fed cuts rates, but rather WHY would Fed cut rates.

When interest rate cuts occur due to lower inflation, it's generally seen as a positive sign for the stock market. As a result, stocks tend to perform well in such scenarios.

On the other hand, when interest rate cuts are a response to economic hardship, i.e. “something breaking” and making the Fed take corrective action, the stock market's reaction can be more complex and varied. Economic hardship could indicate broader issues like a recession, high unemployment, or financial instability. In such cases, while rate cuts might initially be seen as a positive step to stimulate the economy, the underlying reasons for the cuts can lead to a decline in the stock market, not so much as a cause, but rather more as a correlation.

In top of it, it’s all about timing. If the cuts are seen as coming too late or are not aggressive enough, they might not have the desired effect on the economy and could lead to further declines in the stock market.

On the other hand, if the cuts are well-timed and substantial, they could help to mitigate the economic hardship and lead to a recovery in the stock market over time.

So, the best answer is: if the cuts come from lower inflation with a good economy, that will most likely lead to a better stock market performance.