If there’s anyone on CNBC I love, it’s him. Josh Brown From Ritholz Wealth Management.
He does his homework. He’s not averse to using technical methods (in fact, he often relies on them). He accepts defeat. He lets his victories go. He’s not perfect, of course, but he makes a lot of sense, and I’ve used it in some of my own very successful stock picks, including Corning recently.
I get emails from him, and in his last email, he talked about the upcoming “celebratory interest rate cut.”
After this week’s CPI data and Fed Chairman testimony, the Fed is now believed to be ready to cut interest rates in either July or September, but there’s a lot of talk about what happens next. Is it a precursor to a recession? Or a precursor to a stock market rout?
In the email, focus on the chart from Cali Cox And the “Chart Guy Matt” who looked at the last 17 initial interest rate cuts, and looked 365 days to see
- Was there a recession after one year?
- What did the stock market do?
And this is what the results looked like:
It sounds tedious, but it’s actually quite easy. Each price cut re-established the S&P at 100. The chart then looked at the price action over the next year, measuring it into a gain or loss from 100.
If you look at the top lines on the chart (which are all red and indicate years that were in recession), they ended the year at 140. That’s a gain of about 40%.
If we look at the downside, the worst year was the drop to around 65 (which is also a red line). So the index lost 35 points from 100 or -35%.
In terms of recession or no recession, the chart shows the years that did not experience a recession after the first downward revision of the chart (represented by the blue lines). The red lines represent the times that experienced a recession. The years are shown in red.
In summary:
- Of the 17 cuts, seven did not lead to a recession, while ten did. It is difficult for the Fed to steer the ship into a soft landing, but it is happening (at least a year away).
As for the performance of the stock market:
- 4 years ago the S&P was lower.
- One year almost unchanged
- 12 years was higher.
As specified:
- 4 years made gains of about 40% after one year
- In one year, the loss was about 35%, and in another year the loss was about 22%.
What does this mean?
Josh sums it up best…
As you can see, historically interest rate cuts have not been a sure sign of a recession. Sometimes a cut is just a cut.
Also, this does not always mean selling the stock as well.
He adds:
…the set of outcomes that might follow from the initial rate cut is unclear. Crafting a narrative of what might happen to either the stock market or the economy (or both) as a result of the initial rate cut is like an exercise in fairy tale telling. You can’t know because it’s unknowable. Permanent portfolios are the right answer, not forecasting, not extrapolation, not cherry-picking to satisfy a predetermined opinion.
I want to bring this to your attention because based on the June CPI report we got this week, it’s clear that the first rate cut of the cycle is now imminent — probably in July or September. You’ll be reading and hearing countless opinions on what this means and where things are headed, for sure. I want you to be armed with this information so that you don’t fall prey to the financial media industrial complex and start making a lot of bad decisions with your long-term investments.
Don’t believe all the hype about what will happen once the Fed pulls the trigger. Nobody really knows. However, more often than not (10 or 17 times) there is a recession, but more often than not stocks stay up (12 out of 17 times).
Now you know.
