The stock market received exactly what it wanted from the Fed

• The Federal Reserve announced its first interest-rate cut in four years.
• Stock markets initially soared to new all-time highs following the announcement but later retracted.
• Major indexes remained strong, even with expectations of a significant rate cut already factored in.

On Wednesday, the stock market experienced a brief rally, reaching intraday highs after the Federal Reserve implemented its first interest-rate cut since 2020.

However, as the day progressed, major indexes fluctuated and eventually dipped during Fed Chair Jerome Powell’s subsequent Q&A session. Despite this volatility, the resilience of the markets so close to record highs suggested that investors were content with the outcome, especially considering that a substantial cut was already anticipated.

Market strategist Joel Kruger from LMAX Group remarked that the Fed delivered what investors had hoped for with the larger-than-expected 50-basis-point cut.

This decision was consistent with predictions made earlier in the week by Morgan Stanley strategists, who indicated that a 50-basis-point rate cut that wouldn’t alarm the markets would be a best-case scenario for stocks.

Yet, Kruger expressed caution regarding future market behavior. He stated, “Our concern from here will be the market’s ability to continue to feel good about buying risk assets on future accommodative Fed gestures now that the accommodation has been priced to this extent.”

By the market’s close at 4 p.m. on Wednesday, notable fluctuations were observed across the indexes.

Historically, stock markets tend to respond positively to Fed rate cuts. Since 1971, the first cut by the Fed has resulted in gains for investors in every case, averaging around 13% in the following six months, according to analyst Tom Lee from Fundstrat.

Looking forward, investors are likely to closely monitor upcoming economic data releases to evaluate if the Fed’s rapid rate adjustments have successfully mitigated recession risks.

Priya Misra, a portfolio manager at J.P. Morgan Asset Management, emphasized the importance of forthcoming data, stating that the markets will hinge on indicators confirming that the Fed is recognizing challenges within the labor market and acting accordingly.

Wednesday’s decision by the Fed was pivotal, signaling a shift in its primary focus. Jason Pride, chief of investment strategy and research at Glenmede, noted that the Fed is now prioritizing concerns about the labor market over inflation.

This strategic adjustment illustrates the Fed’s response to ongoing economic trends and highlights its effort to balance supporting the labor market while managing inflationary pressures.

Overall, the markets demonstrated a complex but thoughtful reaction to the Fed’s latest monetary policy shift, revealing a blend of optimism and caution as stakeholders consider the broader economic landscape.

Source: Business Insider