US Rate Cuts and Economic "Soft-Landing" Odds to Dictate Stock Performance
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Loading... - Mikhail Petrov
- 27 Aug 2024
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With interest rate cuts likely to begin next month, investors are shifting their focus to economic data to determine whether the "soft-landing" narrative that has driven US stocks in 2024 can continue. Federal Reserve Chair Jerome Powell's dovish message at the Jackson Hole conference has set the stage for a 25 basis-point cut at the Fed's monetary policy meeting on September 17-18.
The market's performance will depend on whether the economy can achieve a soft landing, where growth remains resilient while inflation cools. Upcoming economic data, including the employment report on September 6, personal consumption expenditures price index on August 30, and consumer price index on September 11, will be closely watched.
Historical data suggests that stocks tend to perform better when rate cuts occur during periods of resilient growth, rather than during sharp economic slowdowns. Since 1970, the S&P 500 has climbed an average of 18% one year after the first rate cut in non-recessionary periods, compared to an average of just 2% in recessionary periods.
Powell's speech indicated that the Fed wants to prevent further erosion in the labor market, and jobs data will be closely watched. Weaker-than-expected labor market data could shift expectations towards a 50 basis-point cut next month, which is currently priced at around 35%.
Investors will be watching to see whether rate cuts are driven by moderating inflation or weakening labor market conditions. A rate-cutting cycle introduced due to moderating inflation would be more positive for stocks, while a cycle driven by labor market weakness could be more concerning.
September is historically the weakest month for stock performance, with the S&P 500 averaging a 0.78% decline since World War Two. Encouraging economic data could help bolster stocks during this period, while disappointing data could lead to turbulent trading.
