A check on markets since the Fed rate cut

Given its been a little over a month since the Federal Reserve cut interest rates by 50 bps, we thought we would check in on how markets have performed. Since September 18th, the stock market, as measured by the S&P 500, has increased by about 3.5%, while the 10-year Treasury yield has risen nearly 50 basis points. Interestingly, the US dollar is up by 4%, and gold has increased by about 7%. Looking deeper into the stock market, the small-cap Russell 2000 is about flat since the cut, while the hot semiconductor index is up almost 10%.

• You would expect stocks and gold to be higher after a rate cut
• Both these asset classes generally benefit from an easier monetary environment
• However, what is interesting is that the US dollar is higher, and interest rates, as measured by the 10-year, are higher
• All things being equal, as the Fed lowers interest rates, this is negative for the US dollar
• However, given most of the Central Banks globally have also been cutting and are a bit ahead of the Fed, this may not be the case this time, at least for now
• The 10-year increase is also not something that is widely expected. However, it did trade lower ahead of the cuts so that it could be a temporary trend reversal
• Probably the most notable thing to us is that gold is higher despite both the US dollar being higher and the 10-year being higher
• This seems to point to the underlying solid strength of the market, which we have discussed many times in the past
• Both price action in gold and the 10-year could also mean the market may be getting concerned about inflation again

Goldman’s bold call

A group at Goldman Sachs issued a conservative forecast for the S&P 500, predicting average returns of only 3% annually over the next decade. Adjusted for inflation (assumed at 2%) would mean a real return of approximately 1%. This prediction contrasts sharply with the approximate 13% annualized return of the S&P 500 over the past decade. Goldman’s stance reflects the view that the S&P 500’s past success, driven by easy monetary policy and heavy concentration in large-cap stocks, may not be sustainable. They cite a higher starting valuation as another reason for their forecast. They also believe that the equal-weighted S&P 500 may produce as much as 5% more of a return a year.

• Forecasts in markets are hard, even one year out, let alone a decade
• However, we find this call interesting, given our views on the matter
• We have long written about how, going forward, passive index investing may work differently than in the prior decades (and been wrong!)
• However, it does make sense that it would be hard for a market as concentrated as the S&P 500 is today to produce similar returns to the prior decade
• The drivers of returns over the next decade may come from different sectors and/or companies than before

‍