Investors seem to think if there’s a rate cut by the Federal Reserve, stocks will automatically rally. That may not be the case.
That’s the message from UBS ahead of the Fed’s policy decision on Wednesday. Traders are betting that the central bank would deliver an easing of monetary policy soon to provide the economy with some insurance and hence boosting stocks, but UBS believes such a move would do little to lift the market.
“When it comes to U.S. stocks, the Fed put is dead,” UBS equity strategist Francois Trahan said in a note on Monday. “In the past 20 years, the so-called ‘Fed Put’ has failed to revive equities the way rate cuts did in the 1990s. The two easing cycles of this millennium took place amidst severe declines in equities.”
The correlation between the S&P 500′s price-to-earnings ratio and the fed funds rate has broken due to the long period of low rates since the early 2000s, UBS noted. When the Fed slashed rates in 2001 and 2008 to salvage the economy from recessions, U.S. equities did not rally following the rate reductions. In fact, the S&P 500 fell as much as 16% in the 12-month period after the cuts, the bank pointed out.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.