Rate Cut, Now What?

The 3rd Quarter was bullish for both stocks and bonds delivering positive returns to end the quarter. The stock market closed at all-time highs. This was a course correction from the weak start of the quarter, with uncertainty about the easing of interest rates and inflationary pressures being persistent. July and August put breaks on the possibility of higher returns for the quarter with a weaker than expected jobs report revealing signs that a recession may be on the horizon. This was part of the catalyst for the Federal Reserve to start their interest rate cuts to loosen credit, which helped lower borrowing costs for the consumer. The Federal Reserve delivered a whopping 50 basis point rate cut, 5% to 4.75% Fed Funds Rate, to send stock and bond prices to new highs to end the quarter. Yes, you read it the Federal Reserve has cut interest rates for the first time since March 16, 2020. You remember Covid? Since 2020 the markets have recovered and moved to new highs. Interest rates moved through a rate hike cycle to where we are today, at the start of a rate cut cycle. The markets have shown favor to this reaction by the Federal Reserve. The aggressive interest rate cut signaled that officials have pivoted from fighting inflation to supporting economic growth.  As stocks recovered off the August market sell-off, we saw an interesting asset-class performance change with smaller company value stocks leading the way versus big tech growth stocks. The S&P 500 grew for four straight quarters, posting 18 new highs, while small caps captured its second-best quarter since 2021. U.S. Treasuries and corporate bonds rallied in the light of the Federal Reserve’s move to lower the Fed Funds interest rate, causing bond yields to fall and valuations (prices) to increase. Early in September, the 2 to 10 year yield curve flipped positively, which caused short term interest rates to become lower than longer term interest rates. This was after being inverted, when short term interest rates were higher than longer term interest rates since mid-2022. We can expect higher valuation in bonds as the Federal Reserve lowers the Fed Funds interest rate projected through 2025. Gold and Silver valuations reacted positively to the tapering of interest rates, posting their best performance since 2016.

International markets rallied as China continued to hit the stimulus button to prop up the country’s slothful real estate market and economy. Stocks in Europe, Japan, and Emerging Markets that are more reliant on China’s economic condition posted strong returns. 

The Bank of England continued its monetary easing policy by cutting its overnight lending interest rate in August by 0.25%. It has been a year since the Bank of England’s last interest rate hike. Economic expansion in the United Kingdom has been modest at best, sparking a positive note for the countries shift out of a high-interest rate environment that so far has fended off a recession. Germany, the largest economy in Europe, has not fared as well. 3rd Quarter economic and market data revealed that German business activity continues to slow for the 2nd straight quarter. However, China’s market and economic rebound to date has overshadowed Germany’s economic woes leading to positive growth on the European continent and beyond.

To date 37 countries have cut interest rates highlighting a shift to the global rate hikes that came to combat inflation caused by Covid supply chain disruptions. We wait to see if rate cuts have been made in time to prevent a global, if not regional, recession. 

It is our perspective that investing in a diversified portfolio of asset classes and market sectors is needed to fight the tide of recessionary pressures and provide growth in positive economic conditions. What is the right investment strategy for you? If the answer to this question is unknown, we at Renew Family Wealth welcome the opportunity to meet with you. Please do not hesitate to contact us for a evaluation of your current situation to uncover your need and fulfill your desire for peace of mind.

Thank you for the opportunity to serve you.

Sincerely,

Scott Miller