Why the S&P 500 Fell on the Fed's Rate Cut

Video Credit: The Street
Published on July 31, 2019 - Duration: 01:30s

Why the S&P 500 Fell on the Fed's Rate Cut

Let's get educated, peeps.

Why would stocks fall, if the Federal Reserve is cutting interest rates, which stimulates the economy?

There are two reasons.

But first, let's recap the news.

Rate Cut, Indeed The Federal Reserve, led by Chairman Jerome Powell, has decided to cut interest rates by 25 basis points.

Powell indicated there may be another rate cut before 2020, but certainly didn't use strong language indicating as much.

The S&P 500 fell 0.67% to a touch below 3,000.

The 10-year treasury yield rose to 2.07% at one point, and then waffled around 2.03%.

In the bigger picture, stocks rise when rates fall, and yields in the bond market mirror where interest rates are headed.

Bond prices move inversely to yields.

Rate Cut Was Priced In Let's remember markets are forward-looking.

The question investors ask is, "How much money is this asset going to make me in the future and what will I pay to own it today?" The S&P 500, in anticipation of the interest rate cut, had risen 10% in the three months leading up to the actual rate cut.

The index is up 19% year-to-date.

The 10-year treasury yield had fallen from 2.5% to just above 2% in the same span leading up to the rate cut.

More Rate Cuts, Please?

Low interest rates have been one of the rallying cries of the current bull run -- the longest in American history.

Some investors wanted strong evidence that there will be a few more rate cuts in 2019 after this one.

Powell didn't indicate so strongly that will be the case.

There may be one more in 2019, but as of July 31, it's far from certain there will be one or more.

"As the market was priced for an aggressively dovish outcome heading into the FOMC gathering, today's policy announcement is likely to be met with disappointment in the financial markets," said Candice Bangsund, vice president and portfolio manager of global asset allocation at Fiera Capital.

"Dovish" means more willing to cut rates.

"The Fed was certainly noncommittal on the next move, indeed leaving the door open to further stimulus if warranted - though it fell short of announcing the beginning of a new easing cycle or even fully commit to further easing," Bangsund said.

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