Published September 20th 2024

Daily Brief - How to trade Fed easing cycle

TLDR: In some sense, in spite of hand-wringing about the economy, investors had it easy during the Fed tightening cycle (and the pause): a 5% yield on short-term U.S. debt, one of the safest investments in the world. Doing absolutely nothing, you could earn a decent return. That’s over.

Feds

On Wednesday, the Fed cut its benchmark rate by a half-point (as anticipated here the Friday before). This capped a more than two-year effort to curb inflation with elevated interest rates.

And more cuts are likely behind this one.

The action itself wasn’t surprising. Inflation isn’t quite where they want it but it came down substantially from the post-COVID peak. Meanwhile, the labor market - usually a lagging indicator - showed clear signs of buckling, or at least cooling enough to get the Fed’s attention.

So what now?

Looking through the Toggle Terminal analysis, history offers an encouraging lesson for stock investors. Even when the economy was staring a recession in the face, equities performed well 12 months after the start of a cutting cycle. Over the prior 22 rate-cutting cycles back to 1928, the S&P 500 has outperformed cash by 9.1% on average in the 12 months following the first cut. Limited to only the period since 1982, the performance is even stronger: 9% gain in the 6 months after the first rate cut.

Chart the 22 main rate cutting since 1928

Part of this is reallocation: although stocks did very well, many investors chose to earn interest from holding trillions of dollars in Treasurys, money-market funds and certificates of deposit. Barring a major deterioration, some of that money will provide a floor for any equity selloffs.

Small and medium sized companies usually disproportionately benefit from an easing cycle because they are more dependent on interest-rate sensitive bank loans etc.

However, this environment is also characterized by more uncertainty - will there be a hard landing despite the cuts? - and therefore equity volatility.

Buckle up.

Market Movers: Post a 50bps Rate Cut

Here are the top 3 and bottom 3 performing sectors, according to their 1-month returns, following previous 50 bps rate cuts by the FED:

Top 3:

  • S&P Health Care: 2.25%
  • S&P Consumer Staples: 1.87%
  • S&P Technology: 1.57%

Bottom 3:

  • S&P Materials: -0.57%
  • S&P Utilities: -0.72%
  • S&P Energy: -1.15%

Earnings Spotlight: FedEx profits fall

Fedex

FedEx reported a significant quarterly profit decline and revised its full-year revenue forecast downward, citing customers’ continued shift from fast, high-cost deliveries to cheaper, slower options.

This shift has pressured profit margins for both FedEx and rival United Parcel Service, with FedEx attributing the drop to a decline in priority shipments between businesses. CEO Raj Subramaniam noted weaker-than-expected industrial demand, which is concerning since business shipments are among the most profitable for FedEx.

The company’s stock dropped nearly 11%, and the announcement also impacted UPS shares, which fell 2.5%. "The magnitude of the Fed rate cuts yesterday signals the weakness of the current environment," Subramaniam added, highlighting the broader economic challenges.

Daily Brief - How to trade Fed easing cycle

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