You know what happens? Look at the fricken charts stupid!
I can't make hide nor hair of any of this. Maybe you can?
Here’s What Happens to Markets When Interest Rates Fall, in Charts
History shows some of the prospects for stocks, bonds and other investments
By Sam Goldfarb, Vicky Ge Huang and Peter Santilli, WSJ
Sept. 23, 2024 5:30 am ET
The Federal Reserve’s big interest-rate cut last week is rippling through markets. With additional cuts expected in the months ahead, investors are looking to history to gauge what’s next.
First, the good news: Since the 1980s, investments such as stocks and corporate bonds have tended to perform well in the 12 months after the Fed begins to cut rates.
That all depends, however, on how the economy fares. When growth holds up, or gets boosted by rate cuts, corporate profits tend to be strong. But if the cuts aren’t enough to stave off a recession, investments of all kinds tend to suffer sharp declines. Think of the aftermath of the dot-com bubble and the 2008 global financial crisis.
Here’s what the historical data look like:
Treasurys
The yield on the 10-year Treasury note, a benchmark for mortgage rates and other borrowing costs across the economy, has historically climbed moderately while the Fed is cutting rates.
While that might seem counterintuitive, the 10-year yield reflects investors’ expectations for where rates will be in the future. If the economy is doing well, the Fed might not have to cut as much as investors expected. But there are some notable exceptions. Before the 2008 financial crisis, investors had anticipated a typical modest reduction in interest rates, but the Fed had to cut rates to zero once the economy crashed.
Typically, the start of a rate-cutting cycle marks a period of uncertainty for companies and investors. As time goes on, it usually becomes clearer whether the economy is going to enter recession or not. That helps explain why the S&P 500 index has historically performed well in a rate-cutting cycle.
Many small companies get an extra benefit because they tend to have more floating-rate debt than their larger peers—meaning that rate cuts directly lower their borrowing costs. As a result, the Russell 2000 index of small and medium-size businesses has often outperformed the S&P 500 after the Fed starts cutting rates.
Treasury yields aren’t the only factor that sets businesses’ borrowing costs. Interest rates on corporate bonds are also determined by a risk premium, or spread, that compensates investors for the possibility that a company will default. That spread has often narrowed after the Fed cuts rates, which is consistent with a healthy economy, and has helped to offset the uptick in Treasury yields.
In a recession, corporate-bond spreads can widen, as they did after the 2008 global financial crisis. Investors are worried an economic slowdown will cause a big jump in bankruptcies and defaults, so they demand a higher risk premium for holding corporate debt instead of safer government bonds.
The U.S. dollar tends to weaken in a rate-cutting cycle because it becomes less attractive to foreign investors who are choosing between different currencies. They are typically seeking the highest returns on ultrasafe investments, which tend to closely track benchmark rates set by central banks.
That doesn’t always happen, however, because currencies can swing with world events too. The dollar moved higher in 2001 because of a variety of factors, including investors seeking safety in the dollar after the Sept. 11 attacks.
Gold, often perceived as a haven and a hedge against inflation, tends to benefit from rate reductions. That is because it pays no income, which investors usually mind less when rates are lower.
Gold is priced in dollars, and falling rates drag on the U.S. currency, making gold more appealing to buyers overseas. It can also benefit from economic uncertainty.
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