In September 2024, Jerome Powell announced the first Federal Funds Rate cut in over four years. The Federal Funds Rate is a short-term rate related to the cost of debt in the American economy. Some expected the Federal Reserve to cut only 25 basis points, but they delivered a 50 basis point cut. Powell explained this as a result of data that had grown unexpectedly worse since the Fed’s last meeting. We think they are also being a bit more proactive than they have in the past, which is a good sign.
August’s inflation reading (released September 27th) confirmed the softening trend, seeming to emphasize the appropriateness of the Federal Reserve’s double cut, and possibly signaling more ahead for this year as the Fed becomes less concerned with inflation. With the neutral rate nearing 2%, they have plenty of room.
In recent history, both the 2000 Dot Com crash and the 2007 Financial Crisis rate cutting cycles started with a 50bps cut, circled in red above. These cuts, delivered after major negative impacts, foretold ominous future developments. We’ve also had one of the longest periods with an inverted yield curve, which is another negative indicator when short term interest rates are higher than rates for bonds with maturities further in the future. Similarly, the “Sahm Rule,” named after a former Fed chair, just turned negative. This indicator predicts recession whenever unemployment increases half a percent within a year. Despite that, even Claudia Sahm herself states that her rule is “too simple for the complicated economic situation the U.S. is in right now.” Still, she urges vigilance.
The metrics we track (see linked below)
show consumer debt, unemployment, and other measures are normalizing from historic lows after all the government stimulus spending in the wake of COVID. These signs seem to confirm Sahm’s augury that the economy remains healthy.
Given that rates are coming down and it’s reasonable to expect growth to remain adequate, what does that mean for your investments? To study this, Equitas had to look further back for rate cuts that happened without negative economic shocks. From 1990-2000, there was a single recession, related to the 1990 oil price shock. However, there were three other instances of falling Fed Funds Rates. We can closely examine these periods in order to identify potential trends, or a lack of a trend.
In these particular periods, Large Cap Growth (represented by the dark blue Russell 1000 Growth) performed particularly well. Interestingly, so did the dark red Long Government/Credit Bond index. Both of these investments are considered to pay off more into the future than today, with lower rates increasing the value of those future payoffs. Alternatively, Emerging Market Equities represented by the purple MSCI EM index had the greatest variability, doing best in the 1989-92 cycle but falling to second to last in the ’98 easing cycle. International seems similarly uninspiring.
In review, this is a time to remain vigilant. As history shows, sometimes the only difference between a healthy economy and the brink of recession is avoiding an unexpected shock that impacts the global economy. With open hostilities overseas and labor disputes at home, a prudent investor can find plenty to worry about. While allocations based on 20-year long assumptions can get rocked in the short term, more frequent positioning has the potential to keep your portfolio closer to where the market is moving.
As always, Equitas is continuing to monitor leading economic indicators, technical indicators, and global developments on behalf of our clients. Please don’t hesitate to reach out if you have any questions or would like to discuss how these developments impact your specific financial situation.
In 2002 Equitas Capital Advisors, LLC was established as a unique company that blends the resources of a large global corporation with the flexibility of a small boutique firm. The registered service mark of Equitas Capital Advisors is Engineering Financial Solutions® and the purpose of Equitas is to design, build, and deliver investment solutions to meet the goals and objectives of our investors. Equitas Capital Advisors, LLC located in New Orleans, has over 200 years of combined investment management consulting experience providing professional investment management services to investors such as foundations, endowments, insurance companies, oil companies, universities, corporate retirement plans, and high net worth family offices.
Disclosures and Disclaimers:
Above information is for illustrative purposes only and has been obtained from reliable sources but no guarantee is made with regard to accuracy or completeness. This information is for educational and entertainment purposes only and is not an offer to sell or solicitation to buy any security. The specific securities used are for illustrative purposes only and not a recommendation or solicitation to purchase or sell any individual security. You cannot invest directly in an index.
Equitas Capital Advisors, LLC is registered as an investment advisor with the U.S. Securities and Exchange Commission (“SEC”) and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability.
Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author on the date of publication and are subject to change. This publication does not involve the rendering of personalized investment advice.
Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment or strategy will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals, and economic conditions may materially alter the performance of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for an investor. Charts and references to returns do not represent the performance achieved by Equitas Capital Advisors, LLC, or any of its clients.
Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. All investment strategies have the potential for profit or loss. There can be no assurances that an investor’s portfolio will match or outperform any particular benchmark.