Will the Fed’s Rate Cuts Impact Your Investments?

In the world of investing, the term “volatility” can stir up a lot of anxiety. Whether you’re a seasoned professional or just starting out, the market’s ups and downs can feel unsettling. Volatility refers to the frequency and magnitude of price movements in the market—essentially, how much and how quickly prices change. While these fluctuations can be nerve-wracking, it’s important to remember that volatility is a normal part of investing.

Markets go through periods of both low and high volatility, and this is entirely expected. Low volatility can create a sense of calm, but it can also make sudden spikes feel even more jarring. High volatility, on the other hand, often brings uncertainty, but it also presents opportunities—like buying assets at a discount.

Historically, even in strong markets, we see occasional corrections where prices dip by 10% or more. These corrections, though uncomfortable, are a natural part of the market cycle.

With Federal Reserve's next decision on interest rates scheduled for September 18, the question is whether a rate cut would be positive or negative for the stock market.

Market volatility in perspective

History says whether a rate cut will be a positive or negative for the market depends largely on whether the economy enters a recession.

Let's consider two potential outcomes:

• Soft Landing: If the Fed successfully steers the economy away from recession, the market tends to perform well, with an average gain of over 14% in the twelve months following the first rate cut.
• Recession: If the economy does slide into a recession, rate cuts haven’t historically been enough to prevent a downturn in the market. In these cases, stock prices have fallen by more than 14% on average.

Currently, we don’t see a high likelihood of recession. While jobless claims have risen slightly, they remain below concerning levels. We anticipate GDP growth to slow in the latter half of the year, but not to the point of a significant decline. Given these factors, we believe the soft landing scenario is more probable at this time.

Understanding that volatility is a natural part of investing can help you stay grounded during uncertain times. By focusing on the long-term and being prepared for both calm and turbulent periods, you can navigate the market with more confidence.

Do you think the next rate cut will be good or bad for the stock market?

Chris Wang , Director of Research at Runnymede Capital Management, Inc.