admin June 6, 2019

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Don’t jump the gun — in track, or in buying stocks based on interest-rate cuts.

The market is increasingly salivating at the prospect that the Federal Reserve may make its first interest-rate cut of the cycle, possibly next month.

The Dow Jones Industrial Average

DJIA, +0.23%

  rallied for three straight sessions and opened higher on Thursday as well, after an array of dovish remarks from Fed officials, including Chairman Jerome Powell.

Read: Powell suggests interest rates could be cut if trade tensions damage economic outlook

David Rosenberg, chief economist and strategist at Gluskin Sheff, points out why that’s not a logical reaction.

Sure, he notes, the year after the first rate cut, equity market returns in the next year averages out to a gain of 9.5%, according to data going back to the 1980s. But the year after the last rate cut, the total return on the S&P 500

SPX, +0.16%

  is 22%.

Even in soft landings — that is, when the Fed cuts rates and the economy doesn’t fall into recession — the Fed usually cuts three times, as it did between 1995 and 1996 and again in 1998.

Furthermore, it matters of course whether a recession ensues or not. The S&P 500 index on a 12-month basis, after that first rate cut when a recession occurs, drops 7.2%. The net return on the 10-year note

TMUBMUSD10Y, -1.81%

  is 7.4% in the first year of the Fed easing into a recession.

But in the three months after the last recessionary rate cut, the S&P 500 climbs 20.3%, and bonds rise just 0.3%.

And market models of recession risks are climbing. The New York Fed’s model, he points out, rose in May to the highest non-recessionary reading in 12 years.

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