We’re now just one day away from the start of the Federal Reserve’s interest-rate cutting cycle.
The odds that the central bank will be more aggressive have increased in the last few days. Now, it looks like it will start things off with a bang. There’s a two-in-three chance it will cut the federal-funds rate by 50 basis points (0.50%).
I’ve discussed the potential of both a 25- and 50-basis-point rate cut in the past. You can view each as either bullish or bearish depending on where you’re coming from and what your opinion of the Fed is.
So it shouldn’t come as a surprise to see that the results of a Google search asking “how will stocks react to the Fed cutting interest rates?” are wide ranging and highly inconclusive.
The truth is nobody really knows how investors will react after tomorrow’s announcement.
Regardless of how stocks trade, long-term investors shouldn’t change their strategies. You should still continue to hold on to and invest in solid companies. But if you’re a trader, you might want to buckle up. Get ready for some wild swings – in both directions – the moment Fed Chairman Jerome Powell makes his announcement.
As you can see in the chart above, stocks often make dramatic moves during the last two hours of trading days when the Fed makes interest rate decisions. Volatility is even more dramatic on days when the central bank cuts rates (the green line).
So here’s my final educated guess regarding what to expect tomorrow…
I believe that the Fed will lower interest rates by 50 basis points. Stocks will initially rally, followed by a couple hours of wild swings. By the time the closing bell rings, I expect the market will be up or down by at least 1.5%.
The chart below highlights how large the average S&P 500 moves are on Fed days, and tomorrow should be no different. That should make for a fun day for traders.
For long-term investors, it may be a bit more nerve-racking. It may be worth taking the afternoon off to enjoy a fun hobby instead.
Traders, I suggest getting a good night’s rest to prepare for tomorrow’s big day.
As always, I’ll keep you updated on the aftermath.
Here’s to the future,
Matt McCallEditor, Market Insights
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