What investors should expect from stocks after the Fed's September meeting

The article challenges the conventional wisdom that Federal Reserve interest rate cuts are inherently bullish for equities, presenting historical data since 1980 showing the S&P 500 frequently declined in the months following a cut, particularly when economic weakness prompted the action. It highlights a counter-intuitive recent correlation where the S&P 500 performed better on days when projected fed-funds rates for the September meeting were *higher*, suggesting a potential September rate cut, if driven by recession concerns from weak data like the August jobs report, could signal further market downside rather than a rally. This underscores the need for investors to critically evaluate market assumptions.

Analysis

The prevailing market assumption that Federal Reserve interest rate cuts are an unequivocal positive for equities is challenged by historical data and recent market dynamics. An analysis of rate cuts since 1980 reveals that in 40% of instances, the stock market was lower one month later, and in 37% of cases, it was lower after six months. The market's reaction is highly conditional on the economic context; rate cuts occurring amid economic strength tend to be bullish, whereas those prompted by weakness, such as the recent weak August jobs report, often precede market declines as they signal potential recession. Counter-intuitively, analysis over the past 12 months shows a statistically significant positive correlation between daily S&P 500 changes and the projected fed-funds rate from the CME's FedWatch tool. This was exemplified by the April 2 tariff announcement, which caused both the S&P 500 to fall over 12% and the projected fed-funds rate to drop 26 basis points, a trend that reversed when the tariffs were paused. This suggests that a rate cut driven by negative economic news could be a bearish indicator, reflecting a market that is pricing in economic deterioration rather than celebrating monetary accommodation.

Key Decisions for Investors

• Investors should exercise caution and not automatically position for a market rally following a potential September rate cut, as it may signal underlying economic weakness that is bearish for equities.
• Monitor the drivers behind rate cut expectations; if they stem from negative economic data like weak employment or escalating trade tensions, it may be a signal to reduce equity exposure rather than increase it.
• Given the observed positive correlation between the S&P 500 and projected rates, consider that signs of economic resilience, which would lower the probability of a rate cut, could paradoxically be more bullish for the market in the current environment.
• It is prudent to test widely held market beliefs with statistical evidence and be prepared for contrarian outcomes, as the market's reaction to Fed policy is not guaranteed.