Stock market’s path through the Fed’s easing cycle

Welcome to Equiti Insights! In this issue, we’re focusing on analysing the impact of Fed’s rate cuts on the stock market, key economic data from the US and Bitcoin’s price performance after the halving in April.

This is not financial advice, trading carries risk.

Rate cuts at record highs: What history suggests

Farah Mourad | Senior Market Analyst

With the Federal Reserve's recent rate cut of 50 basis points, the first since 2020, and two more expected by the end of 2024, the market is full of questions.

Despite positive signals such as better-than-forecast jobless claims and GDP data, unemployment remains at 4.2%, creating a delicate balance between inflation control and labour market stability. As inflation approaches 2%, historical patterns offer insights, but today's unique dynamics require a closer look at what might unfold next.

S&P 500 Index vs. Fed Rate

Unlike previous cycles such as the Dot-com bubble or the 2008 financial crisis, the S&P 500 has remained resilient during the 2022-2024 rate hikes. Even as the Fed raised interest rates above 5.25%, the market rallied rather than fell, likely due to strong corporate earnings and ample liquidity.

This raises key questions: Is this growth postponing an inevitable downturn, or is the market navigating high rates without major declines?

When the S&P 500 hovers near record highs and the Fed steps in with a rate cut, the market typically sees an immediate boost. However, the six-month outlook tells a more moderate story, with only 57% of these gains holding. It's a reminder that while a rate cut can ignite short-term momentum, sustaining it is less certain.

One-year impact of rate cuts on the market

Extending the timeline to a year, the S&P 500's response to interest rate cuts depends on the economic background:

• Soft landings: When the economy slows but avoids recession, the market grows 15-20%
• Recessions: If a recession follows, the market can decline by up to 10%
• Overall: Gains of 5-10% tend to emerge after the initial flat period

This shows that the effectiveness of rate cuts heavily depends on the market's overall health and economic trajectory.

Is recession still possible?

This chart sheds light on the percentage of inverted yield curves—often the market’s way of showing caution. When short-term rates outpace long-term ones, investors start preparing for an economic slowdown.

Historically, when 50% or more of yield curves invert, a recession is likely around the corner. While it’s not a call to hit the panic button, it’s definitely a nudge to keep your strategies flexible.

Historically, rate cuts have a noticeable impact on different parts of the market:

• Growth vs. value: Growth stocks tend to do well before the cut, but value stocks often take over and outperform growth by around 5% the following year.
• Small caps vs. large caps: Small caps usually edge out large caps, benefiting from increased liquidity both before and after the cut.
• Bonds vs. stocks: Bonds perform better in the short term, but stocks generally take the lead 6-12 months after when the economy starts to recover.

About Farah Farah Mourad is a Senior Market Analyst at Equiti, recognised for her award-winning expertise in risk management and contributions to top-tier platforms.

https://www.dhirubhai.net/in/farahmurad/ | @fmouradtrading

September data shows no red flags for the US economy

Nadia ElBilassy | Senior Market Analyst

September data revealed the US labour market's continued resilience, sparking concerns that a smaller rate cut may be on the way. Unemployment claims came in at 218K on 26 September, lower than the expected 224K and previous week's 222K, marking the lowest level since May. These reassured markets of the labour market's strength, adding complexity to the Fed's rate cut decisions.

September’s final catalyst, the PCE indicator, came in at 2.2%, below the expectations of 2.3% and the previous 2.5%, suggesting a positive end to September with no major red flags after the August 5th scare. Markets are pricing in a 50/50 chance of a 50 or 25 basis point rate cut in November, although two more NFP reports could clarify the outlook for the US economy.

Diverging paths: China’s slowdown vs. India’s surge

China and India are key markets in the global financial world, but despite their similarities, the recent economic situation of these two countries presents very different trends, opportunities and challenges.

While China’s economic growth has slowed, India is experiencing faster growth. For three consecutive years, India's economy has exceeded growth expectations despite global uncertainty, driven by strong domestic demand and ongoing government efforts. China is also struggling with trade tensions and possible new tariffs, which benefits India as global investors and companies seek an alternative to China for their investments and supply chains.

However, Chinese markets surged recently following the government's announcement of a series of stimulus measures, including lowering reserve requirements for banks and cutting mortgage rates to revive the real estate sector.

These actions have fuelled optimism about a potential recovery of Asia's largest economy, with hopes that it could positively impact the broader region. However, recent economic data indicates a continued slowdown in activity throughout much of the third quarter.

About Nadia Nadia ElBilassy is Senior Market Analyst at Equiti certified by the UAE’s Securities and Commodities Authority, frequently seen at panels and on regional news networks.

https://www.dhirubhai.net/in/nadia-el-bilassy-acsi-174506113/ | @nadia.elbilassy

Bitcoin repeats post-halving pattern and eyes bullish October

Ahmed Azzam | Regional Financial Market Analyst

Bitcoin has reached a pivotal point 170 days after the April halving, echoing a similar juncture in 2020 that saw world's largest cryptocurrency emerge from a period of consolidation and embark on a sustained bullish run.

In 2020, Bitcoin began its upward momentum precisely 170 days after the halving, as reduced supply and increased demand drove prices up. The halving event, which slows the rate at which new Bitcoins are created, has historically been linked to a tightening of supply, which drives price action.

October has often been a standout month for Bitcoin, delivering an average gain of 23% over the past decade, according to market data.

Both in 2020 and this year, Bitcoin's price performance has remained largely range-bound in the post-halving months, fuelling speculation that a similar uptrend could be on the horizon in the fourth quarter, especially given the historically favourable trend seen in October.

History may often repeat itself, but as with any market, nothing is ever certain.

About Ahmed Ahmed Azzam is a Regional Financial Market Analyst at Equiti specialising in technical and fundamental analysis, offering insights as a regular guest on well-known TV networks.

https://www.dhirubhai.net/in/ahmedazzamfx/ | @ahmedazzamfx