Stock Market Reacts to Fed's 3rd Interest Cuts

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While Wall Street is considering a third interest rate cut after several meetings by the Federal Reserve, what can we expect?

Even though there are many concerns about delivering another easing to the stock market that is at or near records, history has shown the market seems to extend its gains after three successive interest rate cuts by a quarter percentage, according to data from LPL Financial.

The Federal Reserve rate-setting committee cut interest rates for the third time this year to 1-5% to 1.75% but the central bank is placing a pause to examine the economy before doing it again. The vote was 8 to 2.

The market has definitely benefited from 3 cuts in the past. But, how good have returns been during those periods when the Fed delivered 3 cuts of 25 basis points/ Actually, they have been very impressive in the 6 to 12 month period following the decision by the rate-setting Federal Open Market Committee.

LPL data shows that the S&P 500 index has been up 10% for 6 months after and 20% from a year ago gauged by 3 initial 25 basis point cuts in 1975, 1996, and 1998.

Green Across the Board

As hard as that might seem to believe, considering the level of equity gains over this year, the S&P 500 index is up approximately 21%, the Dow Jones Industrial Average is up 16%, and the NASDAQ Composite Index has moved up nearly 25% over the last 10 months.

© Source: LPL Financial

We have seen periods of economic slowdowns with three consecutive 25 basis pointcuts, recently in the mid to late 1990s. According to LPL's senior market strategist, Ryan Detrick, the good news, the economy has accelerated after the slowdowns and stocks did really well.

That said, the gains for the U.S. Stock market this year may make it somewhat difficult for the Fed to rationalize the third cut.

The Wall Street Journal's Nick Timiraos said how the Fed broadcasts what will happen next could help to influence investor sentiment. According to The Wall Street Journal, the Fed will be walking a thin line leaving opinions open regarding further rate cuts. 

It's an insurance cut cycle implemented to ward off the harmful effects of the China-American trade war and global economic slowdown. At this time, the U.S. economy appears to be fine for right now.

To date, there are no signs of another rate cut until well beyond February.