In basketball, the “triple threat” position is a stance where the player can either pass, shoot, or dribble. It’s a very athletic stance that creates options. It’s the absolute cornerstone of basketball offense.
In investing, the “triple threat” is the rare investing environment that exists when the Fed starts cutting rates, the economy is strong enough to permit earnings growth, and an equity market that is priced at a reasonable valuation/multiple. A very athletic market that creates options. Today, let’s discuss Triple Threat Part 1: rate CUTTING cycles.
In the past 50 years, there have been a dozen times where the Fed went from hiking rates to cutting rates. The chart below captures forward equity market returns from the point at which the Fed started cutting rates. 11 of the 12 observations are positive markets and the forward returns speak for themselves. 2001 is the notable outlier and involved plenty of other factors (starting from historically high equity market multiples, a massive collapse in corporate earnings, 9/11 terrorism, and countless acts of accounting fraud (Enron, WorldCom, Adelphia Communications to name but a few). But we look at it all so 2001 needs to be counted too.
The bigger point is markets LOVE when the Fed goes from “hiking to pausing to cutting” and we believe that’s where we are and where we’re heading in 2024. The cost of debt goes down and the price of stocks generally goes up. Not everything is a smooth ride but the commencement of a rate cutting cycle cannot be overlooked and one is about to start come this spring. History says markets will love it.
Source: S&P Down Jones Indices via Ned Davis Research as of January 15, 2024
Richard Barrett
Chief Investment Officer
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