Now we all know that the Federal Reserve has finally kicked off its campaign to lower interest rates. Being able to see exactly what is going to happen in financial markets in the months and year ahead would be some powerful knowledge indeed. What happens when the markets become so in-tune and the information is so widespread that everyone knows what’s coming at the same time? This actually matters right now because the entire world knew that Jerome Powell and the Federal Reserve were going to finally cut interest rates. Now is the time to consider what will happen in stocks, bonds, mortgages, gold and even in bitcoin as we all assume that further interest rate cuts are coming.

The Efficient Market Hypothesis states that market prices (or share prices) reflect all of the available information. That also translates to difficulty in generating above-market returns. One of the main mantras of Tactical Bulls is that the Efficient Market Hypothesis is just not very efficient — or that it is dead! If the markets were so efficient, why did stocks sell off on the Fed’s actual rate cut only to see the Dow rally 1%, the S&P 500 rally 1.5% and the NASDAQ rally 2.5% the following day?

Everyone from New York City to San Francisco to Timbuktu was primed and ready for Chairman Powell and the FOMC to cut interest rates at the September FOMC meeting. The odds from the CME FedWatch Tool were a dead tie at 50/50 for 25 or 50 basis points as the prior week’s end arrived. Then the odds crept up to 61% to 65% for a 50-bp rate cut. And presto — the FOMC cut the Fed Funds rate by 50 basis points! The Fed also said it will continue to sell Treasury, agency debt and mortgage-backed securities (peaked at almost $9 trillion in 2022 and was last seen at $7.1 trillion).

This rate cutting campaign is actually unique. That also means it may have a unique outcome. A driving component of its uniqueness is that the start of rate cuts took place 60 days before the presidential election. Another issue for the uniqueness of this rate cutting is that the U.S. stock market was already hitting all-time highs. This move may even keep the historical stock market weakness for the months of September and October less relevant.

WHERE FED FUNDS WILL BE IN 2025

What matters the most to Tactical Bulls in the aftermath of interest rate cuts is how investors need to position for the months ahead and further into 2025. Investors with a long view know that they have to stick to a plan while interest rates are taken back down to a normalized level. Fed Funds had hit a 5.25% to 5.50% range after 11 rate hikes, so even after a 50-bp cut there is plenty of room to cut rates in the coming meetings. This was the live CME FedWatch tool’s mid-point (or three-largest percentages) looked for forward meetings (Dec-24; Mar-25; Dec-25) right as the FOMC decision was imminent:

• December 18, 2024 — 4.00-4.25% (38.9%) and 4.25-4.50% (36.8%)… or 75.7% that Fed Funds will be down 100 to 125 basis points
• March 19, 2025 — 3.25-3.50% (27.9%), 3.50-3.75% (34.4%), 3.75-4.00% (20.4%)… or 82.7% that Fed Funds will be down 150 to 200 basis points
• December 10, 2025 — 2.75-3.00% (24.1%), 3.00-3.25% (25.2%), 3.25-3.50% (17.3%)… or 66.6% that Fed Funds will be down 200 to 250 basis points

One caveat using Fed Funds Futures and the CME FedWatch Tool is that they are using live data and try to use efficiency for predictions. The situation can change rapidly or gradually change over a period of weeks or months. To prove the point, at the end of 2023 and very start of 2024, the tool and futures had both forecast that Fed Funds rate cuts would have started much earlier in 2024 and that they would have been lower than they are currently.

This first of multiple anticipated rate cuts should all be great news for the financial markets. Fed Funds were stuck for a year at generational highs for anyone under the age of about 40. The last time Fed Funds on the FRED (St. Louis Fed) chart had been up in in the 5.25% range was all the way back in 2007. That was right before the housing bubble burst and financial leverage (derivatives) that led to the quite painful Global Financial Crisis.

What may have been discounted ahead of the rate cuts is how stocks and sectors were performing in the days and weeks up to the September 18, 2024 FOMC meeting date. And, of course, there is financial market history to see what markets did after rate cuts in the past. Before you just blindly buy stocks, bonds or other assets do not forget that all rate cutting cycles are different. As the rate cuts are for different reasons at each onset, they tend to result in very different outcomes for stocks, bonds and other assets.

STOCKS COMING INTO FOMC

Stocks had gained so much already with S&P 500 and the Dow touching all-time highs. This was very uncharacteristic of history because the stock market’s worst historical month has been September. Gains YTD were 18.3% for S&P 500 and 10.5% for the Dow Jones Industrial Average. The NASDAQ-100 (dominated by Magnificent 7) was up 15.4% YTD coming into the Fed’s decision. Since the lows set in the early-August panic (just 6-weeks ago) the QQQ is up 11%, the SPY was up 9.7% and the DIA was up 8%.

Do we dare remind readers that historical expectations for entire yearly gains have been looking for a total return of somewhere closer to 8%? Now here are some noted about the SPDR (or competing) individual sector ETFs YTD and versus 1-month ago:

• Financials (XLF) up 20% YTD; up 3% 1-mo.
• Industrials (XLI) up 16% YTD; up 3.5% 1-mo.
• Technology (XLK) up 13.5% YTD; down 3% 1-mo.
• Consumer Discretionary (XLY) up 8% YTD; up 4% 1-mo.
• Consumer Staples (XLP) up 16% YTD; up 3.5% 1-mo.
• REIT/Real Estate (XLRE) up 12% YTD; up 6.7% 1-mo.
• Retail (XRT) up 5.5% YTD; down 1% 1-mo.
• Energy/Oil (XLE) up 5% YTD; down 3% 1-mo.
• Utilities (XLU) up 24% YTD; up 5% 1-mo.
• Healthcare-iShares (IYH) up 15% YTD; up 1% 1-mo.
• Materials (XLB) up 9% YTD; up 3% 1-mo.

BONDS AND RATES COMING INTO FOMC

Treasury yields had already come down handily in the intermediate and longer-dated Treasury notes. The shortest T-bills remain at 5% and higher, but here is how Treasury yields are looking now versus a year ago:

• 1-yr 4.00% (5.43% year ago)
• 2-yr 3.61% (5.04% year ago)
• 5-yr 3.45% (4.45% year ago)
• 10-yr 3.66% (4.31% year ago)
• 30-yr 3.96% (4.40% year ago)

MORTGAGES & BORROWING RATES

The yield on an average 30-year fixed mortgage fell to 6.15% at the end of last week. That was down 14 basis points from the prior week and is actually being shown as the lowest levels since late in 2022. Loan applications for purchases and refinancings are up as well, and refi-apps are now above half of all apps and above the historic 48% median per the Mortgage Bankers Association.

Keep in mind that the current mortgage rates may still be high compared to pre-hike levels but that are down handily over the last year. The MBA noted just ahead of the rate cuts that 30-year mortgage rates peaked in late 2023 at roughly 8%. That means rates are down over 175 basis points since the absolute peak at the end of the rate-hike cycle. One thing that may complicate the mortgage market is that long-term interest rates having already come down significantly may have already taken fixed rate mortgages lower. This s a time when lower rates me be found in adjustable-rate mortgages (ARMs) if borrowers are willing to forget about the past few years.

The Prime Lending Rate is where interest rates start for the most creditworthy customers and for businesses that are not large enough to borrow from capital markets with hundreds-of-millions in corporate bond offerings. PRIME is expected to drop by the same amount as a Fed Funds rate cut, but prime was 8.50% ahead of the FOMC decision on rates. It was down at 5.25% three years ago at the end of the easy money cycle.

Gold often has its own reasons to rise or fall. Still, it’s not just mountain dwarves who want large stockpiles of gold for when times are tough. @JONOGG

GOLD & BITCOIN PRICES

Gold recently challenged $2,600 per ounce. Tactical Bulls has laid out the path for much higher gold prices, with $3,000 in the sights for 2025 or shortly thereafter. Keep in mind that regardless of dollar strength or weakness, those all-in sustaining costs keep rising quarter after quarter and year after year for gold miners and producers. On top of energy and machinery costs, the regulatory and environmental costs only seem to rise — and wages of the miners and transportation costs just seem to keep rising as well.

Here are just some ousted gold price forecasts in anticipation of interest rate cuts continuing:

• Bank of America sees gold rising perhaps to $3,000 by the end of 2025.
• Goldman Sachs has a $2,700 forecast by the end of 2025.
• SocGen sees $2,800 by 2025.
• UBS sees $2,700 for gold, perhaps by mid-2025.

Keep in mind that gold was very recently seen up about 25% YTD as it was approaching $2,600. Gold still looks primed to head to $3,000.

And what about the mighty Bitcoin closing out at $42,500 or so at the end of 2023? That was last seen at $59,500 for a gain of 40% YTD. That is incredibly impressive, but now consider that the “peak bitcoin” price in 2024 was roughly $73,700 depending on your pricing source. That “peak” had Bitcoin up over 70% YTD at its zenith earlier in March-2024.

A driving force in Bitcoin, other than the 2024 Presidential election, has been the launch of Bitcoin-related ETFs. The top Bitcoin ETF is iShares Bitcoin Trust (IBIT) with a whopping $20.7 billion in assets. Grayscale and Fidelity each have $10 billion or more in Bitcoin exposure, and nearly $5 billion in total exposure is seen adding up ARK, Bitwise and a leveraged ETF.

WHAT ABOUT AFTER PAST RATE CUTS?

The big question now is what to expect after today. The only question coming into the cut was whether or not this “first cut of multiple cuts” would be 25 or 50 basis points. Tactical Bulls has compiled figures from multiple sources to use for determining how this easing cycle may look compared to past easing cycles. As most hikes and cuts were “coming and known” it makes for an interesting review of what was happening in the financial markets — particularly when there were surprise or emergency rate cuts.

If the Fed kicked off an easing cycle due to an existing or pending crisis (recession or panic), then the markets still faced trouble in the months after the cutting began. If the Fed’s rationale to begin an easing cycle was to take the foot off the brakes as celebration (for a soft landing) it has generally been good for the stock market. Isn’t this round of Fed rate cuts supposed to be celebrating the return of inflation to normalized levels and into a “soft landing” for the economy?

There is a serious caveat here about the warning that all Federal Reserve easing cycles are different. This new rate-cutting cycle, despite being a celebratory event, is the first time in modern economic history that the Federal Reserve began cutting rates less than 60 days ahead of a Presidential election. Being apolitical is a goal of the Fed in its dual mandate of keeping inflation at 2.5% (or under) and keeping the economy in a place where there can be full employment.

Markets have dealt with Many rate-cutting cycles since the early 1990s when the FOMC began an open communication about policy shifts and rate changes. The markets have also endured rate hikes as well, and those rate hikes have seen multiple outcomes in stocks and bonds after they began to take hold.

Tactical Bulls is giving the moves and a synopsis behind each of the major rate-cutting campaigns and economic cycles.

1990 TO 1992 GULF WAR RECESSION

The start of the 1990s was a unique period in time. Fed Funds were over 8% after seeing double-digits and high rates through much of the 1980s. Then a guy named Saddam invaded Kuwait, the U.S. and an entire Western alliance took Kuwait back away and went deep into Iraq. It was a quick war when Desert Shield Became Desert Storm, and the recession was less than a year. From Q4-1990 Fed Funds was lowered from over 8% down to about 3% by the end of 1992 — with 18 rate cuts in that timespan. There were first six different 25 basis point cuts after starting in July-1990, followed by a 50 basis point cut, followed by seven more 25 basis point cuts.

The S&P 500 did not bottom until around October of 1990 after losing over 20% of its value in about 15 months. It only took six months to recover all of its losses as the rate cuts were coming on strong. By the end of 1993 the S&P 500 had rallied 45% and then stocks continued to rally yet another 100% in the coming years. The stock market and economy were hot even as the Fed reversed and began a major rate hiking campaign.

1995 REACTION TO THE BOOM – A SOFT LANDING AFTER MEGA-HIKES

The rate cuts in 1995 were very positive for the stock market because this was after having 300 basis points of a major wave of rate hikes from early-1994 to mid-1995. That had been 7 rate hikes in 13 calendar months and the hiking cycle was dominated by 4 rate hikes at the start in the first 100 days or so. The rate cutting that began in 1995 was only three minor cuts of 25 basis points each and resulted in a soft landing rather than the economy falling back into recession.

Alan Greenspan had staved off rekindled inflationary pressures and the economic strength didn’t turn to turmoil because there was growth just about everywhere. Still, rates only came down marginally from just over 6% down to 5.5%. The S&P 500 rose over 6% in three months and was up about 20% a year later. Again, the economy was still growing strong at the time.

1998 REACTION WAS WAY BEYOND THE FED

In 1997 a quick scare came from the “the Asian Contagion” and then came the implosion of the highly leveraged Long Term Capital in 1998 (followed by a quick financial bailout). The Fed ended up taking out 75 basis points over a 4-month period. As the stock market was ready for a bounce-back rally after a sharp 15% sell-off already, the market shot back up 15% in a few months and it was up 22% a year later. This snapback recovery and extended gain was not at all only engineered as Fed-induced rally. The tech and internet rally had already started. The technology sector then ran higher through almost all of 1999 and valuations became grossly extended (before that tech bubble and dot-com bubble burst in March-2000).

This was a period when Fed Chairman Alan Greenspan was coined using phrases of “irrational exuberance” and “cupidity.” The Fed was already hiking rates again in 1999 and the Fed Funds rate was back up 150 basis points to 6.5% in mid-2000. And even during that time, the S&P 500’s trough to peak gain was nearly 50% in two years. This was the biggest boom time for day traders and swing traders, right up until it wasn’t.

THEN CAME 2001… PAIN ALREADY & THEN TERROR

As stock valuations reached a zenith (remember GE at 30 times earnings?), the stock market gave out after the dot-com bubble burst. Over the course of 2001, there were 7 rate cuts from January to August to get Fed Funds down from 6% to 3.50%. The recession was already building and became an official recession in March-2001. September arrived and then the unthinkable happened as the 9/11 terror attacks changed society forever. After the Pentagon was hit and the World Trade Center saw both towers gone with thousands dead, the Federal Reserve did an emergency cut as the markets were reopening after being closed all week, hen three more cuts in 2001 to get Fed Funds to 1.75%.

It took another year before tech stocks started to recover. There were countless layoffs, with corporations cumulatively announcing hundreds of thousands of layoffs immediately after 9/11, and even the economic recovery needed financial stimulus for further juice.

MID 2002-03… ECONOMIC ANEMIA

The recovery that was getting underway in 2002 and in 2003 was less than impressive. As continued “uncertainty” was becoming a household economic term and as the aftermath of 9/11 had spread to Iraq, the Fed decided to cut rates again while inflation was under 2%. There was even a concern of deflation for the first time in two generations. With a NOV-2002 cut of 50 basis points and then a mid-2003 cut of 25 basis points, Fed Funds had entered a lifetime low as they hit 1.00%. It was truly unheard of. There was also a SARS scare in Asia which did not help the ailing economy.

The cuts of 2002/03 after the pain of 2001 were actually just minor adjustments. The economy began to heat up in 2004 and asset prices were rising sharply. From 2004 to 2006, the Fed raised rates in 17 rates hikes of 25 basis points each as housing prices were starting to become excessive. Even after a 400 basis point move higher with Fed Funds all the way back up to 5.25%, Americans continued to buy second homes and speculative properties they did not need (nor could afford). The banks had been involved in over-the-counter derivatives that only exacerbated a housing bubble and when this started to unravel in 2007. Even in 2007, with cracks already well underway, the financial markets still hadn’t really come to grips with what was coming.

2007/08 CUTS… A PAUSE, THE CRISIS, ENDLESS Q.E.

As the housing prices were falling precipitously and as stocks were starting to slide, the Federal Reserve decided to begin cutting the Fed Funds rate in Sept-2007. What started out looking like normal rate cuts in late 2007 as credit was becoming a wider risk suddenly became much more intense in 2008 when the FOMC cut rates another three times (75-bp, 50-bp, then 75-bp more all within 60 days) — all right before and immediately after the humiliating failure of Bear Stearns (bought by JPMorgan Chase & CO. (NYSE: JPM) for almost noting). And the financial crisis continued as the housing market went from bad to incredibly worse.

The rate cuts paused in April with Fed Funds down to 2.00% after having been 4.75% just eight months earlier. While much speculation about financial institutions might fail next, the FOMC took a wait-and-see approach as the Presidential election was less than six months away. Again, the FOMC usually tries to be apolitical.

The implosion of Lehman Brothers was in mid-September-2008, and the FOMC decided perhaps less-than-brilliantly a day after the bankruptcy of Lehman that it would “monitor the deteriorating situation” despite noting strains, continued labor market weakness, lower spending, tight credit and so on. One of the problems was that rates were already extremely low at 2.00%. And there was the election. October of 2008 brought two rate cuts (50 bp each cut) to 1.00%, but after the election in December the FOMC did what was previously unimaginable — a 100 basis point cut that took Fed Funds to a 0.00% to 0.25% range.

As rates couldn’t go lower (we hadn’t seen negative rates before) the Fed decided that quantitative easing (a term never used before) was worth embarking on as it began buying trillions of dollars of bonds with freshly printed (at least legered) dollars from the Treasury and growing the Fed’s balance sheet from about $900 billion at the time up to over $2 trillion in just a few months.

This was a time of financial and social panic and stocks in the S&P 500 did not hit rock bottom until Feb-March 2009. The National Bureau of Economic Research is formally in charge of declaring recessions and their recession dates of December-2007 through June-2009 didn’t quite match sentiment at the time. The economic pain started earlier in 2007 did not really feel like the risks were done (“abundance of cautious” was commonly used) until at least 2010. Many housing markets remained weak even in 2010 and 2011 after investors had been the only buyers of distressed assets.

While quantitative easing and low/no interest rates persisted until 2015, the Fed’s balance sheet rose endlessly under quantitative easing. The Fed’s balance sheet peaked at the very start of 2015 at more than $4.5 trillion. Looking backwards in time it almost seems impossible to consider that the rate cuts and QE were left in place for more than half of a decade.

2015-18 HIKING THRU THE TRUMP YEARS, UNTIL…

The Federal Reserve did not begin to even hike interest rates off the 0.00% to 0.25% Fed Funds floor until December-2015. The FOMC then left rates static at 0.25% to 0.50% until December-2016 after the presidential election was over. Again, trying to remain apolitical in an election year — or maybe the Fed was worried about very poor economic developments in China. Interest rates were raised gradually in 25 basis point increments once every three months in both 2017 and then again in 2018. It was a total of 9 hikes (all just 25=bp each) and Fed Funds settled in at 2.25% to 2.50% by the end of 2018. And stocks were sliding hard in late-2018 with nearly a 15% correction in the S&P 500.

The economy in 2019 under Fed Chairman Jerome Powell and President Trump had softened and a mid-cycle rate cut campaign from August through September saw three consecutive 25-bp rate cuts taking Fed Funds back down to a 1.50-1.75% range. This was during the Trade War years and unemployment was holding very firm at rates under 4%. Inflation was also handily under the Fed’s 2.00-2.50% target. And the S&P 500 was up about 28% (closer to 32% with dividends reinvested) in 2019.

2020 EMERGENCY CUTS UNDER COVID-19

In 2020, the year was off to a great start. The economy was buzzing after a mid-cycle rate adjustment in 2019. Then came news of a serious virus outbreak in Wuhan, China, then the virus named Covid-19 started spreading. And by March 12, 2020 the entire U.S. economy was being shut down, workers were being sent home, and travel to and from most international (and many domestic) destinations was becoming next to impossible. At the start of March-2020 Jerome Powell and the FOMC reacted to the rapidly declining economy with a 50-bp cut to a range of 1.00-1.25% and less than two-weeks later Powell cut the Fed Funds rate 100-bp back to the 0.00-0.25% range.

It took almost no time for 20 million people to become unemployed and for the unemployment rate to rise to almost 15%. The Paycheck Protection program (PPP) was launched and companies began taking workers back in. The U.S. quickly became a work from home economy and unemployment was back to under 7% by October. Because of the easing and the beginnings of the PPP coming to light, stocks reached a selling panic bottom in March 2020 and then regained all the losses and hit new all-time highs again in the summer of 2020 with a snap-back rally of almost 40% in the S&P 500.

The U.S. had the shortest recession in economic history, and managed to avoid the next Great Depression, but the Fed’s balance sheet activity was another big boost on top of rate cuts. At $4.15 billion in late-February, the Federal Reserve’s balance sheet exploded (with newly legered dollars again) to $7 trillion in May-2020. It was unprecedented and it prevented waves of likely bank failures from loan write-downs and gave them the capital they needed to weather the Covid-19 storm as customers and businesses were being given extensions and deferrals on just about any and every loan outstanding.

The FOMC was slow to begin hiking rates in 2022 — but the 0.00-0.25% Fed Funds range rose all the way to 5.25-5.50% by July-2023 after 11 rate hikes (with six hikes being 50 or more basis points) as inflation was taking off.