Commentary: Don’t hold your breath for a stock market rally if the US Fed cuts rates

First, the cut may not be significant. In fact, Minneapolis Fed President Neel Kashkari has downplayed the possibility of cuts larger than a quarter of a percentage point.

Second, it would likely take a series of cuts to truly give markets the momentum they need.

You may recall the rate cuts introduced by the Fed during the “Great Recession” from 2007 to 2009. Then, in response to the economic downturn, the Fed slashed rates seven times, going from 4.75 per cent at the end of 2007 to 2 per cent in September 2008.

Only six months later did the US S&P 500 really start experiencing gains of 304 per cent from March to December 2009. Why the time lag? It is likely that a series of cuts is required to offer certainty of the direction in which the markets are heading. Investors need that certainty.

Do not forget the elephant in the room: Inflation. The August 2024 consumer price index rose a paltry 0.2 per cent month over month and 2.5 per cent year-on-year. This marks the smallest annual increase since February 2021.

But overall inflation may continue to rise with ongoing geopolitical tensions that could impact the US. Unrest in the Middle East, for example, could disrupt oil supply and trade; and the ongoing war in Ukraine continues to disrupt global supply chains. The situation today is vastly different from that of the “Great Recession”, and we may not witness a recurrence of multiple interest rate cuts.

Then too, market growth may have reached its limits. The S&P 500 has surged since late October last year, with the market capitalisation increasing by close to 36 per cent, but it is likely that these gains have already reflected the anticipation for a rate cut.

A forecast compiled by Reuters from equity strategists, analysts, brokers, and portfolio managers between Aug 8 and Aug 20 suggests that the benchmark of the US S&P 500 will reach 5,600 points by the end of 2024.

Bear in mind that when the market closed on Sep 12, the S&P 500 was trading at 5,595 points. This implies a potential limited upside of only 0.089 per cent as compared to the golden number of 5,600 points that market watchers expect it to reach by the end of 2024.