A Fed rate cut with the stock market at a record low? Here’s what history says.

The Federal Reserve cut interest rates on Wednesday, with US stocks trading near record highs, leaving investors looking for historic clues about the way forward for markets.

The S&P 500 SPX briefly traded above its July 16 record close after the Fed offered a 50 basis point rate cut before erasing the gain to finish 0.3% lower. Stock index futures indicated strong gains that could send the S&P 500 and Dow Jones Industrial Average DJIA to another run in record territory.

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Do interest rate cuts with stocks at or near all-time highs provide additional fuel for the bulls or portend trouble ahead? Dow Jones Market Data rolled back the tape.

They found that since 1990, the Fed has cut interest rates seven times while the S&P 500 has been at or near (within 1%) its all-time high (see chart below).

In those cases, stocks tended to rise on the day of the decision (not including Wednesday) — up 71.4% of the time, with an average gain of 0.51%. Six months later, performance is mixed, rising 57.1% of the time with a tepid average gain of 0.62%.

Analysts at JPMorgan looked at data going back 40 years, finding the Fed cut rates 12 times with the S&P 500 within 1 percent of its all-time high. The market was 12 times bigger a year later, with an average return of about 15%.

That’s interesting, but does it really tell investors much about the direction of the stock market during the easing cycle? As countless market watchers have pointed out, it tends to really depend on the economic context.

“Historically, only half of bond growth has occurred by the time the first cut arrives. The direction of the stock market is less clear – entirely
it depends on whether the Fed prevented a recession or whether this rate cut came too late, as we have witnessed so many times in the past,” David Rosenberg of Rosenberg Research said in a note on Wednesday.

“The danger this time,” he wrote, “is the extreme level of complacency and widespread consensus that the business cycle has been abrogated.”

The story continues

Related: History says that Fed rate cuts create “foolishness” for stock market investors

— Ken Jimenez and Steve Goldstein contributed.

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