Story Highlights
- Last September, stocks fell by 17%. Investors, fearing uncertainty, sold their shares.
- Today, investors are just as worried. That could cause stocks to decline 5% or more — but one key difference this year will send stocks higher in coming months.
- And one sector is set to surge because of it. Click here to learn how you can take advantage of the surge.
A quick look at the S&P 500 Index price chart is frightening.
It reveals a pattern like the one that pummeled U.S. stocks beginning in September 2018. The S&P 500 lost 17% in three months.
If today’s price action follows that path, stocks could begin a 5% to 10% decline — or more — at any moment.
Take a look at the S&P 500 Index price chart below.
Financial news outlets are preparing us for the worst. Headlines from CNBC to Bloomberg figure a U.S. recession might well be imminent.
But their warnings are premature.
Markets are right where we want them because of one key difference in today’s market backdrop.
Here’s what’s going to propel stocks higher in the months ahead — and how you can take advantage.
3 Ways Rate Cuts Can Help the Economy
Investors’ speculation and escalation in the U.S.-China trade war has created lots of volatility. Stocks have moved up and down in violent fashion since the start of August.
The story is not new.
The U.S. and China exchanged trade war blows all last year.
At the same time, the Federal Reserve was increasing interest rates. Rates increased four times last year, and the S&P 500 lost 7%.
But rate hikes are a thing of the past.
The Federal Reserve doesn’t want to make it harder for money to flow through the economy.
So, the Fed began to cut rates last month.
And it’s got another cut scheduled for this month.
In theory, rate cuts do a few things:
- Incentivize businesses and consumers to borrow money to spend or invest in the economy. Lower rates make it easier to finance purchases and justify starting new projects.
- Create a perception of financial market stability. Stable markets make capital accessible. Reassured investors help the economy press on.
- Increase the competitiveness of U.S. companies that do business overseas. A nation’s interest rates influence the value of its currency. Falling rates reduce a currency’s value, whereas rising rates increase its value. It’s not the only factor, but Fed rate cuts reduce the value of the U.S. dollar and make American goods cheaper to foreign buyers.
Altogether, Fed rate cuts help the U.S. economy and reassure investors.
The Fed Knows the Sweet Spot for Rate Cuts
As a result of rate cut expectations, the S&P 500 is up 14% year to date — despite the media crowing about the trade war and a possible recession.
And there is more where that came from.
The Fed knows risks are lingering, but it remains confident in the U.S. economy.
Last month, the market expected the Fed would cut rates.
It cut the Fed Funds interest rate by only 25 basis points, equal to one quarter of a percentage point.
It will cut by 25 basis points again this month.
That’s good news!
According to MarketWatch research, looking back to 1990 shows us the stock market goes higher after the Fed lower rates by 25 basis points.
“A quarter-of-percentage point has tended to be a Goldilocks number, resulting in an average return of 3.67% three months later and 5.64% in six months.”
Sure, the outlook for the U.S. and the global economy can deteriorate. If the economy cracks and financial markets go haywire, all bets are off.
Otherwise, we’re set up for another Goldilocks rate cut!
I focus my attention on natural resource markets. On August 21, I explained how the materials and energy sectors perform well in the six months following the start of Fed rate cuts.
My colleague Matt Badiali and I recently launched a trading service built around that focus.
It’s called Apex Profit Alert, and it uses options to leverage the gains traders can make on short-term trends in resource stocks.
In other words, it helps us know when to use the short-term moves of the stock market to get a larger return.
Click here to learn more and join us in our trades.
But whatever your focus, the Fed is giving investors a reason to buy stocks again.
Good investing,
John Ross
Editor, Apex Profit Alert