If you think a rate cut by the Federal Reserve would boost the stock market, think again, UBS warned.
In fact, the S&P 500 has fallen slightly since the central bank delivered the first rate reduction in more than a decade in July. That’s because the correlation between the S&P 500′s price-earnings ratio and the Fed funds rate has broken due to the long period of low rates since the early 2000s, UBS noted
“Fed rate cuts are not likely to fuel equities higher as they did in the 1990s,” UBS equity strategist Francois Trahan said in a note on Tuesday. “The Fed-easing rallies of the 1990s were made possible by a strong inverse correlation between interest rates and P/Es. This relationship no longer exists today.”
Stocks just finished a volatile third quarter with the S&P 500 still eking out a small gain. Investors had a choppy ride over the past few months with the escalated trade war taking a bite from the economy. The U.S. manufacturing sector contracted in August, its first decline since 2016, according to a gauge from the Institute for Supply Management.