Rate Cuts: Entering a New Era of Explosive Stock Earnings

For months we have suspected that interest rate cuts would arrive by the end of the summer. And with the central bank set to cut in just days – next Wednesday, September 18 – it looks like the forecast is proving correct.

But it’s not just rate cuts we’re anticipating here. We expect the Fed’s rate-cutting cycle to reinvigorate our weakened economy and, as a result, kick-start a long-lasting rally in stocks.

Last week, we looked at the historical precedent in support of this theory – the rate cut cycle of 1995.

That era is a close parallel to the economic context we have today. And when the Fed started cutting rates at that time, it helped fuel a huge multi-year rally in stocks.

Today we’ll consider two other comparable cycles—and more evidence to support our theory stocks are about to go crazy.

History shows that the Fed will open the floodgates

In September 1998, the Federal Reserve began a proactive rate-cutting cycle while the economy was still generally healthy. GDP was around 5%. Jobless claims measured about 290,000. The US was experiencing healthy economic growth and relatively low unemployment.

Today, we have a very similar setup. GDP is running at around 3% and jobless claims are around 230,000. Indeed, as was the case in the late summer of 1998, we currently have good economic growth and relatively low unemployment.

These rate cuts in 1998 triggered a huge stock market rally. From the first cutting in September 1998 to early 2000, S&P 500 increased by about 30%, while Nasdaq increased by 175%.

The “good” rate-cutting cycle of 1998 helped trigger a huge multi-year stock market rally, particularly in tech stocks.

But of course this was not a unique situation.

In August 2019, the Federal Reserve began another proactive rate-cutting cycle while the economy was still generally healthy. GDP was around 3.4%, while jobless claims measured around 215,000. Again, we had good economic growth and relatively low unemployment – ​​just like we do today.

And needless to say, those rate cuts in 2019 sparked a huge stock market rally. From the first rate cut in late summer 2019 to early 2020, both the S&P 500 and Nasdaq are up about 15%.

We believe this rally would have lasted longer – and produced bigger gains – if not for the exogenous shock of the COVID-19 pandemic in early 2020.

Although, regardless, the point remains: 2019’s rate-cutting cycle helped spark a major rally in stocks.

We believe that an equally “good” cycle of rate cuts will begin in just a few days.