TLDR: On Wednesday, when the Fed meeting concludes we should get a lot of interesting information. One thing is unlikely to change (along with the rates, which are also staying on hold): at long last, the market and the Fed agree on rate cuts in 2024. Rates are gonna come down next year, if these forecasts prove to be correct. In fact, the Fed sees itself cutting even into 2025. Is this a good thing for stocks?
Rate cuts typically happen because the economy is slowing and/or even entering a recession. On the face of it, that doesn’t seem to be a great event for stocks.
However, when we test this in our neat Scenario tool, you can see that a 100 bps drop in Fed Funds rate over a 12 month period results in a disproportionately strong stock market performance.
The upside vs. the downside outcomes are completely skewed in the ratio of almost 3-1 in favor of upside. More than a fifth of the time the stocks were up 17.16% or more. And less than a fifth of the time they declined more than 6.73%.
To be fair, there are some bad tail outcomes on the downside, mostly from the global financial crisis. But you’ll be able to spot that scenario.
Why the positive skew on rate cuts?
Mostly, because by the time the Fed has cut rates the bad economic situation has already been priced in. Fed cuts signal that the worst is either over or soon to be, and that leads to a stock rally.
Anyway, this is just hypothetical for now. The expectation for this Wednesday is the Fed will stay on a “watchful hold” - doing nothing while monitoring the data carefully.
What's happening in the markets?
This section is powered by Open AI connected to TOGGLE AI
Bitcoin and various other cryptocurrencies have seen an upward surge, sparking optimism among traders aiming to break free from the prolonged stagnancy in digital asset prices.
Bitcoin notably surpassed the $27,000 mark, contributing to its impressive 60% growth so far this year. This upward momentum is reflected in the increasing number of active addresses on the Bitcoin network, indicating a growing user base, coupled with a rise in realized volatility?view=chart) after reaching a four-year low last month.
Additionally, recent analysis by Toggle has shown that historically, when Bitcoin's transaction value has dipped, it often led to a subsequent median return of approximately 60% over the following six months. Intriguingly, this pattern has consistently occurred before significant Crypto booms.
However, amidst this promising data, the looming Federal Open Market Committee (FOMC) meeting this week is anticipated to exert an influence on cryptocurrency prices, injecting an element of uncertainty into the market dynamics.
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