The Federal Reserve finally cut interest rates. Today we’ll set the record straight by reviewing history to learn what’s likely ahead for equities now that policy easing is upon us.
Some folks are upset about the upcoming rate cuts for this reason or that. But we need to stop fearing rate cuts.
First, interest rates cuts spur economic growth. A decreasing rate environment shrinks the cost of capital and lightens debt burdens. This allows larger profits to fall to the bottom line.
Thus, interest rate cuts are good for the economy.
Guess what? They’re good for stocks too.
The Fed has rolled out nine rate cut programs since 1990.
On average, after all nine of these initial rate cutting episodes, the S&P 500 jumped 7.7% a year later. That performance includes battling through the Great Financial Crisis and dot-com crash.
The thing is though, right now is not like either of those times, or any other catastrophe. Right now, things are pretty good. Employment is solid, recession is a no-show, and the consumer is alive and well.
When rate cuts happen in the kind of environment we’re in, stocks can thrive. Just look at the forward returns for large-cap, mid-cap, and small-cap equity benchmarks following the Fed’s initial rate cuts since 1995 (capturing small- and mid-caps from their starts):
After one- and two-year periods, large stocks did well. But small- and mid-cap equities did great in those same time frames, using the exchange-traded funds iShares Core S&P Small-Cap ETF (IJR) and iShares Core S&P Mid-Cap ETF (IJH), respectively, as proxies.
For long-term investors, that two-year performance is eye-popping!
Big Money professional investors are already placing bets on more juicy gains. There’s some real risk-on action that’s taking hold. You can see it in the way our proprietary Big Money Index (BMI) is ripping higher.
The BMI is a 25-day moving average of Big Money’s buys and sells netted. It’s the stock market’s North Star. If it’s trending up, institutions are buying stocks.
That’s the case since the June consumer price index release:
As that chart and the ones that follow show, this isn’t a recent phenomenon. Big Money has been buying for the better part of a month, and especially recently:
What’s Big Money buying? From Sept. 16-18, it was clearly smaller stocks:
And there could be more of this ahead.
Bears are in a tough spot. Macro signals are lining up against them and Big Money is moving in.
In this new rate-cutting environment, what are the best stocks to own?
In short, portfolios thrive holding shares of companies with fantastic businesses and ample Big Money support.
The MAPsignals process can show you where the Big Money flows!
If you’re a serious investor, Registered Investment Advisor (RIA), or a money manager looking for hedge-fund quality research, get started with a MAP PRO subscription today.
Lucas is a well-versed equity investor and educator. He currently is co-founder of research and analytics firm, MAPsignals.com, which focuses on finding outlier stocks by following the Big Money.