Investors have long been hoping that the Federal Reserve will start cutting interest rates, but data shows that that outcome could create trouble for the equity market. On average, the S & P 500 is usually up 2% 65 days before the first cut from the central bank following a hiking cycle, according to data from Strategas. But it’s usually down by 1.5% 65 days after that initial rate reduction, implying that stocks may not be off to the races after the big announcement. “The dispersion of returns following the first cut reinforces the idea that investors need to be that much more aware of the landscape when the Fed starts cutting,” Strategas managing director Ryan Grabinski told clients in a note last week. The numbers vary widely across different instances. In 1974, for example, the S & P 500 was down more than 8% in the 65 days prior and off by more than 25% in the same period following the cut. But in 1989, the broad index was up more than 12% in the 65 days preceding the rate reduction and still higher by more than 9% in the period after. The average performance can throw some cold water on the outlook for investors, who have hedged hopes on rate cuts this year. Fed funds futures indicate a chance of at least one rate cut as early as September, with the potential for a second at the last meeting of the year in December, according to CMEGroup’s FedWatch tool . Hopes for lower rates in the near term were lifted last week as data on consumer and wholesaler inflation showed indications of cooling. May’s consumer price index came in flat from the prior month, while wholesale prices unexpectedly slipped 0.2%. The latest reason for optimism on the rate front came Tuesday, with May retail sales data coming in slightly below economists’ forecasts. That can add to a growing body of evidence of a slowdown in consumer spending. But some have also cautioned against leaning completely into the “bad news is good news” mentality. “While that may be good news for inflation hawks, it could be the beginning of a slowdown in growth, which would hurt a lot more than a couple of interest rate cuts would help,” Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said following Tuesday’s data. “The big story of this bull market has been the resilient consumer and without them, the economy would have slowed – or fallen into recession – a long time ago.” Grabinski cautioned that at a 4% unemployment rate , it’s historically considered rare for the Fed to see enough reason to decrease the interest level. But with what he called a “high bar for additional hikes,” Grabinski thinks the next move for the central bank besides keeping the rate steady is more likely to be a cut.
