Alan Greenspan was head of the Federal Reserve from 1987 through 2006. He is fondly remembered for his support of the equity markets. During the 1987 crash, he gave banks special permission to reduce margin and reserve requirements. This allowed them to loan funds to market makers in order to create price support during the crash. In 1998, during the collapse of Long-Term Capital, Greenspan again reduced rates to prevent a market downturn. Market forecasters began to believe there was less risk due to Greenspan lowering interest rates whenever the markets started to get into trouble. This became known as the “Greenspan Put”.
This week the Fed cut interest rates 50 basis points. Many market participants are concerned that the current Fed is following the path of Alan Greenspan, trying to prevent the stock market from having a downturn along with preventing excessively leveraged companies from going into bankruptcy.
Forecasters since November of 2023 have been calling for as many as six rate cuts for this year. The most aggressive was UBS who projected the Fed discount rate would be as low as 2.75 percent by the end of this year. Most forecasters predict rate cuts because they want their investors to believe that rate cuts will stimulate the stock market and create a new upward trend in the market.
The Federal Reserve System has two mandates: maximum employment and price stability. Upon examining the most recent second quarter output, Real GDP increased 3.0 percent at an annual rate, and the PCE (Personal Consumption Expenditures) was up 2.9 percent year-over-year. The current unemployment rate, as of July 2024, is 4.3 percent.
The following table gives the dates of rate cuts since 1990 and the current unemployment, GDP, and PCE at the time of the rate cut.
Notice the economy does not necessarily need to be in bad shape for the Fed to cut rates.
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The question becomes, is there something the Fed sees other than the mandate for employment and prices which will lead them to lower rates? Regardless of the motivation, the table below gives the return of the S&P 500 index for one year after the Fed began lowering rates.
| Date of Rate Cuts | Total Cut | S&P Return 1yr Forward |
| 7/13/90 to 9/4/92 | -525 | 3.67% |
| 7/6/95 to 1/31/96 | -75 | 23.11% |
| 9/29/98 to 11/17/98 | -75 | 37.93% |
| 1/3/01 to 6/25/03 | -550 | -13.04% |
| 9/18/07 to 12/16/08 | -525 | -12.97% |
| 8/1/19 to 3/16/20 | -225 | 9.76% |
For those who want to believe that the lowering of rates will immediately help the stock market, look at 2001 and 2007. After the Fed began to lower rates, we saw the stock market drop 13.04 percent in 2001 and drop 12.97 percent in 2007 for the year following the beginning of the rate cuts. There is no guarantee that the stock market prices will go up. Of the six rate cut cycles since 1990, the stock market has been up as much as 37.93 percent and down as much as 13.04 percent in the following year.
While the general consensus is that rate cuts lower the cost of capital and thereby stimulate the economy, it’s important to acknowledge the complexity of economic forecasting. As Jim Hatzius, the chief economist at Goldman Sachs, aptly stated in The Signal and the Noise, by Nate Silver, “Nobody has a clue. It’s hugely difficult to forecast the business cycle. Understanding an organism as complex as the economy is very hard.”
All investors should recognize that growth and contractions are a part of a healthy economy. The most successful investors will create a portfolio which will withstand all adverse and beneficial outcomes.