The Fed’s recent rate cut, while good news for the economy, doesn’t necessarily guarantee a surge in the stock market. History shows that rate cut cycles, while usually beneficial for stocks, often don’t lead to immediate gains. We analyze the historical relationship between rate cuts, the yield curve, and stock market performance to understand why investors should remain cautious and vigilant despite the recent Fed action.
The US Treasury yield curve has finally exited its inversion after over two years, signaling a potential shift in market sentiment. This move, driven by weaker-than-expected economic data and the Federal Reserve’s expected pivot towards easing interest rates, suggests investors are now betting on a softer economic landing. However, the implications for inflation and the potential for future economic challenges remain.
The August jobs report, with slower-than-expected hiring, sent markets into a risk-off mode on Friday. Major indices dropped, the Nasdaq 100 faced its worst week since September 2022, and investors moved into cash, pushing the U.S. dollar higher. The bond market saw a shift in the yield curve, and commodities experienced losses.
The US Treasury market experienced a sharp rally on Friday following the release of August labor data, which showed weaker-than-expected job growth. This fueled expectations for interest rate cuts by the Federal Reserve, leading to a decline in Treasury yields and a positive shift in the yield curve.
