Why Markets Fell After Getting Half-Point Rate Cut

When the Federal Open Market Committee (FOMC) decided to cut rates by 50 bps for the first time in four years, markets initially spiked higher. However, the Russell 2000 (IWM), S&P 500 (SPY), and Nasdaq (QQQ) all closed lower on Wednesday.

Markets had more than a year to get the rate cut they wanted. Traders already priced in the FOMC’s looser policy. This change will help struggling consumers, who cannot afford automobile loans or renew their mortgage at higher rates. Realistically, the Fed helps alleviate the government’s interest costs in servicing its debt.

Chances are low that people will buy new vehicles. The lower auto loan rate will not increase the affordability of vehicles at a higher price point. For now, continue to avoid General Motors (GM), Stellantis (STLA), and Ford Motor (F) stock.

Why the Fed Cut Rates

The Fed saw that the direction of inflation was toward its 2% target and the job market appeared steady. Still, the Consumer Price Index report benefited from WTI crude prices at lower-than-expected levels. Energy investors will underperform for a while longer by holding Devon Energy (DVN), APA (APA), and EQT (EQT).

The accommodative monetary policy will continue from here through next year. This should stimulate the economy and potentially avoid a recession. The higher activity should lead to higher demand for energy.

Index investors may decide not to change their strategy at this time. Stock markets are trading near an all-time high while the price-to-earnings is elevated. Market participants only need to shift to a cautious sentiment to compress the P/E. Unless the rate cut boosts GDP growth and corporate earnings, stocks are at risk of correcting from here.