Investors spent much of 2019 worried about if and how quickly the U.S. economy would slow down. When the Fed pivoted to a dovish stance towards the end of 2018 and started cutting rates without a significant economic slowdown, investors rushed to scoop up equities.
With three "insurance" rate cuts now in the books, has the Fed set up the economy for a soft landing instead of a full-blown recession? Time will tell but it's become a real possibility that the U.S. will be able to avoid the textbook definition of recession.
Whether or not it does will be a big factor in how the equity markets perform over the next year.
Moadel considers equity market performance following a third Fed rate cut during both periods of recession and expansion.
The results are fairly predictable. When the Fed is cutting rates as the U.S. is entering recession, it takes some time for the ship to turn around. The economy is still struggling and equity market performance reflects those struggles. During the past five recessionary periods that came with a trio of rate cuts, there were virtually no returns to be had in equities.
During periods where the economy was still expanding, however, were a different story. With the economy still relatively healthy, rate cuts simply added fuel to the fire and made money even cheaper during a time when consumers and businesses were already spending and growing.
History suggests that the market is in for a steady climb over the next 12 months with the average gain at 23% a year from now.
This may or may not come to pass but the economic landscape is certainly pointing in that direction, especially if we get a more comprehensive trade deal.
Despite sitting at record highs in the S&P 500, stocks are still a buy.
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