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
Â 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 thatâs 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
Â is 22%.
Even in soft landings â that is, when the Fed cuts rates and the economy doesnât fall into recession â 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
Â 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 Fedâs model, he points out, rose in May to the highest non-recessionary reading in 12 years.