Did the Fed Just Spark a Bull Run?

We had a Fed meeting last week where they cut interest rates. It’s seen as the first rate cut in a cycle – the start of a new rate-cutting cycle.

There were some stats in the IFR this week which said that the S&P 500 goes up on average 15% per annum in the year after a rate-cutting cycle has started.

Every Fed meeting, you sort of have to leave it a couple of days before you really get the market’s reaction. Not everything that happens in the stock market is driven by an instantaneous algorithm that gets it right.

What happens after a Fed meeting – if it’s a pivotal moment, which it sort of was last week when they decided to start cutting rates – is that it takes time for fund managers to sit in their asset allocation meetings and decide: what are we going to do about this? Is it material? Should it change our allocation?

We saw it in November 2023 when the market bottomed. The Fed told us the inflation problem was beaten, and the market took off for 18 months.

This is another pivotal decision. Not huge, it was sort of expected, but still significant. And you’ll see from what’s happened post-Fed meeting that, after a couple of days, the market started to lift.

Since the Fed meeting, the S&P 500 has been up 3.3%. You might think that’s not really material, but if an index is going to go up 9% per annum and it does 3% in three days – that is material. It tells you a lot of fund managers sat in their allocation meetings and said: right, this is going to drive equities, make financial markets safer, and we’re going more “risk on”.

“Risk on” just means taking a bit more risk with allocation – generally speaking, weighting more towards equities.

Since the beginning of the month, the US market is up almost 7%. That’s an annual return in three weeks. It’s happened in anticipation of the Fed meeting and then post-Fed, as more money came in.

What a backdrop of falling interest rates does for fund manager thinking, and for your thinking, is that it lowers risk. It’s a positive driver. It puts more money into equities. It makes everything feel a little bit safer.

Yes, everyone’s talking about overvaluation. But when you’re talking large asset allocation decisions from fund managers who run hundreds of billions of dollars, they’re not doing it for this week. Hedge funds are pumping away in the short term. But the big money is driven by big events. This was a big event.

Money’s coming into the market, and you should feel more comfortable that we’ve now got a backdrop of falling interest rates in equities. That’s how the big fund managers think, and their horizons are long term.

Yes, the market’s overvalued. Yes, people always worry about a precipitous collapse the day after they invest. But the truth is this is a very strong driver. It’s quite long term. Of course it could change if we get the wrong inflation number, but it’s an important driver.

And you can see what fund managers are doing – they are going more risk on. And it should make you feel a little bit more comfortable.