September Charts of Interest: Rate Cut Edition

Yesterday’s 50-basis-point interest rate cut by the Federal Open Market Committee (FOMC) was the first cut since March 2020. So, I start this month’s charts of interest by showing you how the FOMC’s target rate has changed over time. This chart is from the St. Louis Federal Reserve’s FRED database.

FOMC members anticipate making more interest rate cuts this year, as their “dot plot” below shows. The median projection calls for the target rate to end 2024 at 4.4%. Three months ago, the median projection of committee members was 5.1%. (For 2025, the median end-of-year projection is now 3.4%, down from 4.1%.)

Source: “Summary of Economic Projections,” by the Board of Governors of the Federal Reserve System, September 18, 2024.

The Mortgage Market Has Started to Adjust

“While mortgage rates do not directly follow moves by the Federal Reserve, this first cut in over four years will have an impact on the housing market,” stated Freddie Mac this morning. “Declining mortgage rates over the last several weeks indicate this cut was mostly baked in, but rates will likely fall further, sparking more housing activity.”

All-Time Highs and Interest Rate Cuts Have Been Good Partners

The $64,000 question is: Where do stocks go from here? Since I am generally an optimist, I’ll start with the good news.

The S&P 500 index has gone on to realize positive 12-month returns when an interest rate cut coincided with the S&P 500 trading near an all-time high. Carson Group chief market strategist Ryan Detrick, CMT, says this has happened 20 consecutive times.

But … the Ride Could Be Bumpy

The S&P 500 has experienced an average maximum drawdown of 20.7% within one year of the Fed starting “a fast-cutting cycle,” observed Charles Schwab senior investment strategist Kevin Gordon. The average maximum drawdown for a slow-cutting cycle is 7.4%.

There have typically been economic problems and/or a shock leading the Fed to cut interest rates. Such issues help to explain the prior downturns in the S&P 500. We are not facing either right now, though there are signs of the economy cooling off.

Fewer Companies Are Talking About Inflation

FactSet counted 235 S&P 500 companies as having mentioned “inflation” on their second-quarter 2024 earnings conference calls. This was the second-lowest number since the second quarter of 2021 (216 companies). Unsurprisingly, the drop coincided with a decrease in the consumer price index (CPI). The blue line and left-hand axis are the number of S&P 500 companies. The green line and the right axis are the CPI.

Dividends + Long-Term Investing = Lots of Income

Here’s a chart I shared last week in AAII Dividend Investing. The folks at Lord, Abbett & Co. LLC plotted the income generated over time by an initial investment of $10,000 each in the S&P 500 and the Bloomberg U.S. Aggregate Bond index. Thanks to earnings growth, the income from dividends far exceeded the income from bonds.

 Source: Lord, Abbett & Co. LLC.

There are two notes I will add to this. First, the higher income from dividends only occurs if you have the ability and discipline to stay with stocks. Second, bonds can play a useful role in a portfolio depending on your tolerance for risk and need for more certain income.

Less Pain at the Pump

One area where we are seeing deflation is at the pump. One gallon of unleaded gasoline now costs an average of just $3.22 nationally. This is $0.66 lower than one year ago. “Gasoline demand and oil costs are low, so pump prices may soon resume a slow descent,” notes the American Automobile Association (AAA) spokesperson Andrew Gross. According to AAA, there are 14 states with average gas prices below $3.00 per gallon, “and several more may soon follow.”