Don't Fear The First Rate Cut

Summary: The Fed may soon cut rates and that prospect is making investors nervous. Is the start of easing necessarily bad for equities? In short, probably not, at least not immediately. There's more to it than that.

Equities have most often risen after the first rate cut. The only times when equities have consistently traded lower was when they were already doing poorly.

Moreover, the economic data had already been persistently weak for many months (even years) prior to the times when the first rate cut was followed by a recession and an equity bear market. That's not at all the case this time, making it similar to years like 1984, 1995 and 1998 when rate cuts were subsequently reversed with further rate hikes.

There are never any guarantees but it's probably different this time, in a good way.

The Fed is now expected to cut its overnight rate 3 times in the next year (from Jim Bianco). Enlarge any chart by clicking on it.

It's probably worth taking those 3 rate cuts with a tablespoon of salt. Look again at the chart above: just 5 months ago, expectations were for at least one rate hike in the next year, and last September the expectation was for more than 3 hikes. Things have swung wildly in the other direction and they may well do so again. Rate expectations have very frequently wrong (from DB).