Can a Fed Rate Cut Be a Bad Thing?
Be careful what you wish for!
It’s commonly believed that when the Fed cuts interest rates it’s a good thing for stocks.
While this is generally true, there are certain exceptions. And a big exception is if the Fed is cutting rates because the economy has rolled over into a recession.
Under those circumstances, the bad news about the economy can overwhelm the good news about the Fed lowering rates.
Take a look at the chart below to see what I mean.
The vertical blue lines indicate the last two times the Fed starting cutting interest rates in response to an economic downturn.
As you can see, both times the Fed cut interest rates the market collapsed with stocks falling over 40% in 2001 and 54% in 2007.
With this in mind, I’m feeling extremely cautious about the benefits of the Fed cutting interest rates at its meeting next week.
The Fed meets next Tuesday and Wednesday, June 18-19. The market is anticipating that the Fed will cut interest rates at this meeting, and then at least two more times this year.
Indeed, this belief has been the primary driver for why stocks have been roaring higher from their December 2018 lows…
The chart below of the S&P 500’s performance illustrates this point.
But what if the market is WRONG about rate cuts this time, and we’re in a situation in which the economy is rolling over into recession?
I ask this because I’ve noted that several assets that are closely associated with the real economy are indicating that it’s in serious trouble…
Important Assets are Flashing “Danger” for the Economy
We’ve noted in recent articles that bond yields (or Treasuries) and Copper are both great indicators for where the economy is headed.
The yield on the 10-Year Treasury closely tracks economic growth.
And Copper is an industrial metal that is so closely associated with economic growth, that it’s called “Dr. Copper… the commodity with a PhD in economics.”
Today there’s a third asset I’d like to discuss that’s also a great indicator for where the economy is headed: FedEx (FDX).
FedEx is the largest private mail carrier/shipping company in the U.S.
As such, FedEx’s business is HIGHLY correlated to economic growth. FDX shares rise based on higher shipping volumes/a strong economy and fall based on lower shipping volumes/a weak economy.
With all three of these assets in mind, take a look at the chart below.
Here’s the breakdown:
- 10-Year Treasury in green
- Copper in blue
- FedEx in orange
- U.S. Stocks in black
As you can see, the 10-Year Treasury, Copper, and FedEx are all down right now while stocks are up. This tells us that stocks are WRONG… and our economic indicators are flashing warning signs to the stock market.
To have even one of these assets warning us about the stock market is enough to pique my interest…
But to have ALL THREE of them saying the same thing? That’s REALLY cause for concern!
Unlike most investors, I’m preparing for a scenario in which a Fed rate cut is in fact a BAD thing based on the economy rolling over.
On that note, I’m about to tell subscribers of my Strategic Impact newsletter about two investments that could easily DOUBLE as the wheels come off the economy in the coming months.
I’ll let you know when it hits ― along with how to access it.
In the meantime, if you have any questions, comments, or feedback feel free to send them here.
Editor, Money & Crisis