As you know, last week the central bank cut the Fed Fund Rate by 50bps. This week we want to review how financial markets have reacted to this cut.
As you might expect, the S&P 500 (US Large Cap Stocks) has increased by 2.5% since the Fed announcement. Investors have become more optimistic on the path of interest rates and on the likelihood of an economic soft landing.
Matching the optimism from the stock market, the yield on the US 10 Year Treasury Bond also increased from 3.64% to 3.77%. While it has only been a short time since the cut, it appears that both the broad US stock and bond markets agree that the Fed’s decision has improved economic prospects.
The US Dollar has continued its decline as well post rate cut falling by an additional 0.55%. In the last three months, the USD has declined by 5.4% vs the broad currency basket (DXY) as global currency traders bet that the Fed would begin its rate cutting cycle. We’ve been expecting this dollar softening all year and the tailwind that would generate for international stocks.
Since the beginning of August, the Global Developed Ex-US Stock Market Index is up 13.9% and the Emerging Market Stock Index is up 18.5%. Just since the Fed cut on September 18th, the Chinese stock market is up 23.7%.
Since mid-summer, we’ve been experiencing a rare event where yields, oil and USD are falling in tandem. Each of these on its own would boost US corporate profits, but in combination, they could deliver a very strong Q4 earnings beat.
If the broad optimism in global stocks and the coordinated decline in yields, oil and USD continue, we would expect a strong finish to the year for stock returns.
