The Federal Reserve just cut interest rates for the first time in over a decade, and if history is any indication, Wall Street should be celebrating.
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The U.S. central bank on Tuesday lowered its benchmark interest rate 25 basis points to a range between 2 percent and 2.25 percent, citing low inflation. It was the Fed’s first rate cut since 2008.
And while the Fed’s decision may not appease President Donald Trump, who was calling for a “large” rate cut, stock-market investors who live by the age-old adage of “Don’t fight the Fed” are likely celebrating.
That’s because the last five times the Fed initiated rate cuts while the U.S. economy was expanding, the S&P 500 gained an average of 11.1 percent over the following six months and 15.8 percent over the next year, according to LPL Financial.
“Even though fundamentals may not justify the market going much above our 3,000 forecast on the S&P 500, with the Fed tailwind behind us, we’ll ride the wave for now,” he wrote.
But not everyone thinks the stock market is headed higher if the Fed cuts rates.
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“History is clear on this one,” wrote Morgan Stanley Equity Strategist Michael Wilson.
“If this is the beginning of a full-blown rate-cutting cycle by the Fed, stocks don’t do well after the first cut. On the other hand, if the cut is not associated with a further slowdown, but rather a reacceleration or stabilization in growth (i.e. an “insurance cut” that pays out), then equity markets have a chance to move higher and finally break above 3000 on a sustained basis. The consensus appears to be in the latter camp and we remain in the former.”
