Fed’s hawkish rate cut could be good for the stock market in the long run, analysts say

Fed Chairman Jerome Powell signals his confidence in the U.S. economy.

  • By Chris Matthews,
  • MarketWatch
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U.S. stocks fell in the wake of the Federal Reserve’s decision to cut interest rates by just 25 basis points, and the selloff gathered steam during Chairman Jerome Powell’s subsequent press conference, where he gave the impression that Wednesday’s cut was a “mid-cycle adjustment to policy” rather than the first in a series of actions to lower interest rates.

The Dow Jones Industrial Average (.DJI), S&P 500 index (.SPX), and the Nasdaq Composite index (.IXIC), all closed down more than 1.1%, after trading flat for most of the day. But the market’s initial reaction could give way to healthy returns in the coming weeks, as investors focus more on the Fed’s confidence in the health of the U.S. economy in the context of historically low interest rates that make equities a relatively attractive bet, analysts and investors tell MarketWatch.

The selloff in the final hours of trade Wednesday “was a bit bigger than I anticipated,” said Brad McMillan, chief investment officer for Commonwealth Financial Network, in an interview.

“I think this is going to be fairly short term,” he added. “We’re seeing a gut reaction as investors recalibrate their expectations for future rate cuts, but when you get back to the fundamentals, a healthy economy with a bit of stimulus is not the worst thing in the world.”

Yousef Abbasi, director of U.S. institutional equities and global market strategist at INTL FCStone, told MarketWatch that the decision “could give you more volatility in the coming days, but as we settle into August you’ll see equities start to perk again.”

“My assumption is that we could start to see a buy-the-dip mentality, created by the easy money move and the need to chase returns,” he added.

“The biggest surprise here is what’s not being said,” wrote Mike Loewengart, vice president of investment strategy at E-Trade, in an email. “There is nothing in the statement about growth cooling here at home.” Despite the market’s short-term disappointment with the magnitude of the easing action, he added, “investors should consider low rates the new normal for the considerable future.”

Low rates will continue to support a higher-than-average valuations for the S&P 500, McMillan said, at the same time that corporations are growing revenue at a healthy clip and appear set to avoid the earnings recession that many investors had been fearing this year.

Of course, any further deterioration in U.S. economic data could throw this logic out the window. John Vail, chief global strategist at Nikko Asset Management, wrote in an email that he expects “further global economic deceleration to levels that are moderately below current consensus forecasts,” due in part to additional U.S. tariffs on Chinese imports and, more broadly, a worsening of global trade conflicts.

For this reason, he expects the Fed to cut rates three times this year, a move that will ‘help soften the blow” of a weaker economy, but not protect equity markets entirely from the uncertainty that a significant slowdown will sow.

But even Vail’s more dour scenario — he predicts weakness in equity markets for the next 12 months — will not completely derail the argument for stocks in the coming quarters. “For long-term investors,” he wrote, “our forecasted declines, especially after dividend income, will not bad enough to make a major shift in allocations out from equities, but certainly counsels cautious investment behavior.”

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