🍎 🍕 Less apples, more pizza 🤔 Have you seen Buffett’s portfolio recently?Explore for Free

Do Rate Cuts Guarantee Bull Markets? History Says It’s Not That Simple

Published 08/20/2024, 04:12 AM
XLP
-
XLV
-
XLK
-
XLU
-
  • The anticipation keeps building for a potential rate cut in September.
  • As markets begin to price in a 25bp cut, we explore the key question on everyone's minds.
  • Can rate cuts ensure a continued bull run?

Markets are forward-looking, reacting more to future expectations rather than just the current conditions.

This is a key idea to keep in mind, especially with the potential Fed rate cut in September being highly anticipated. Many investors are hoping this cut will solve all their problems.

But let’s set the record straight: a rate cut doesn’t automatically mean stock markets will rise.

In fact, in the short term, it can sometimes lead to corrections because the market may have already factored in the rate cut. So, if investors have been expecting this move, it might not have the impact they’re hoping for.

Reaction to Rate Cuts

It's crucial to ask, "Why is the Fed cutting rates?" If the cut is part of a strategy to soften monetary policy after tightening it to combat inflation, then it makes sense.

But if the cut is merely a reaction to worsening economic conditions - aimed at avoiding a recession that might still happen - then the situation is quite different.

Markets are always evolving, and investing means accepting a degree of uncertainty. Those who handle this uncertainty better tend to see greater rewards over time, while those who struggle with it may not fare as well.

Do Tech Stocks Really Benefit From a Rate Cut?

Looking at sector performance, there’s a common but misleading belief that rate cuts automatically boost tech stocks (NYSE:XLK). While a lower discount factor can lead to higher valuations, it doesn’t always mean tech will outperform.Sectors Benefitting From Cuts

In reality, defensive sectors like utilities (NYSE:XLU), consumer staples (NYSE:XLP), and healthcare (NYSE:XLV) often benefit more from these situations. Bonds follow a similar pattern.

Bond Market Reaction

Bottom Line

While it’s tempting to assume that rate cuts will automatically benefit certain sectors, the real impact can be more nuanced. So, when it comes to investing, always be wary of what seems obvious, as markets rarely follow a straightforward path.

***

Do you wish to discover how to leverage 13F filings to track the latest moves of leading hedge funds and take your investment strategy to the next level?

Join us for an exclusive webinar hosted by Jesse Cohen, senior analyst at Investing.com, and learn how you can copy the latest investments of great investors.

Register now and gain the expertise to make smarter, more strategic investment decisions.

Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.