Stock Market to Perform better after the Fed Rate Cuts?
All things considered, stock market performance since 2019 hasn’t been so bad. It’s been great. Better than great, even.
From October 8, 2019, to October 8, 2024, the market pulled in a total of +95%. That’s an average of +19% annually. If you threw $100,000 into the market (in 2019), your balance would have grown to $238,635. This represents a 139% increase.
With stock market uncertainty mounting yet again, what does the future hold? Yes. Especially with the following the downturn of 2022 and the restructuring through 2024.
Economists are speculating that we’re entering a new Bull supercycle. We are seeing higher interest rates for savers stick around through 2025. Unemployment remains under 4.5% while labor expertise is increasing. Geopolitical stability and economic volatility will continue. Tech and Energy will take a front seat to modernize the world through 2050.
And there’s that pesky election 2024 wrapping up on November 4th. If the human race somehow avoids total collapse, the future (post-federal rate cuts) looks interesting.
Table of Contents
The History of Market Performance Post Federal Rate Cuts
Since 1928, the S&P 500 has had 29 inflation-adjusted down years.
That’s roughly 32 percent of the time with the average return in a down year is -13.7 percent. The worst return was -38.08 percent in 1931 and the least severe negative return was in 2011, with a -0.87 percent inflation-adjusted return.
It’s important to remember the market can’t continue to win indefinitely. Not unless something seismic happens i.e. the Pandemic.
These losses through 2022 were cyclical, mostly due to overinflated bubbles, hyper overexpansion spurred by Big Tech, access to cheap debt, and good old American Greed. However, these corrections present an opportunity to buy in cheap. In the shadow of the pro-risk environment, companies had to adjust. They cut labor and administrative bloat.
Post rate cuts, companies now have a balanced growth and earnings runway. Although, American household savings are at a low, consumption is still ultra resilient. The scenario is ripe for savers and especially for investors.
Opportunity by any other name
Economists are now saying that we are entering the next Supercycle. This is an opportunity that serves the next generation. While you won’t get into Google at $50, you could get into a CAVA stock for $50 in 2023 and grow +225% in 2024. There is no shortage of future opportunities.
Let’s look at the data to see how the stock market has performed after a down year.
Stock Performance after a “Cocaine Bear” Market
Here is a graph of the stock market performance from 1872 through 2023.
As you can see from the graph, the S&P 500 normally has a good year after a down year. Nearly 65% of the time when the S&P 500 experienced a negative return, it experienced a positive return the following year.
That’s the majority of the time.
If you picked tails over heads for the long run, you would generally hit the median of 8.5 percent. For every coin flip, it’s a likelihood that you will pick tails every time. The calendar year 2022 was a down year (-18.11 percent), however, 2023 was an up year (+26.29 percent). As of October 15, 2024 (pre-election), the market is running north of 20 percent with the likelihood of closing out at +29 percent.
Invest In a Risk Appropriate Manner
As you can see from the data, there is plenty of risk when it comes to investing in the stock market. In any given year, you have a 32 percent chance of losing money. If you have to unfortunately sell during a downturn, like many people did during the 2008-2009 crisis, you could miss out on gains years into the future given the stock market generally moves up and to the right.
Your goal is to invest in a risk-appropriate manner based on your risk tolerance. Also consider, your time horizon as you develop your investment plan.
During COVID, some folks jumped on the dividend investing or REIT routes while missing out on super growth gains. I almost fell for that honey trap as well.
While equities should be just one part of your net worth, as you age, you should have exposure to real estate (for cash flow), fixed income, and money market accounts for liquidity. The key to long-term wealth is its preservation while maximizing its output.
When it comes to the economy is “an extraordinarily diverse and dynamic animal,” Joe Quinlan, the chief market strategist at Bank of America. It’s “a $28 trillion hydra-headed behemoth that beats to the tune of many different sectors.”
As the Fed’s higher rates were putting a strain on rate-sensitive sectors like housing — which makes up 16% of the economy — Big Tech and travel-starved households were spending money fast and loose. The experience showed that overall consumption can continue to rise even when significant swaths of the economy are struggling.
Goldman Sachs Group Inc. strategists said, “U.S. stocks are unlikely to sustain their above-average performance of the past decade.” But let’s hope that’s just the ravings of a madman. “In Tom Lee of Fundstrat, I trust.” He said the market is still in “Buy the dip” mode (ref. video 10.21.24 linked here).
Recommendation to Build Wealth
My best recommendation is that you get with the program. Capitalism doesn’t work for your household without capital.
The best way that most Americans can gain participation in the market is through their 401k (equivalent, 403b or 457b). In addition to the HSA and IRA, a single-earning household can contribute north of $30,000 per year to reduce their taxes and invest. A dual-income household can contribute twice as much.
Investing is one of the best ways to earn wealth while staying farther ahead of inflation.
To track your wealth, sign up for Personal Capital. While historical stock market performance doesn’t guarantee future performance, you will be better off staying on top of your finances. If you think you don’t have the dollars to invest, I often run into new parents who miraculously find more than $500 per week for daycare. Turns out, you might already have the money, you are likely mismanaging it.
Solution – Master your bad spending impulses by setting S.M.A.R.T.+E.R. goals.
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