Equity investors should take no comfort from the likelihood that the Federal Reserve will continue to cut interest rate, as there is a strong positive correlation between annual changes in the All-Share index and in the Fed funds rate since 1996, according to Investors Chronicle.
Historical data shows some of the best gains in equities have come during the tightening cycle of the mid-2000s and 2016-17. Conversely, share prices dropped during the 2001-02 and 2007-08 rate cut cycles.
It appears the investors associate easing cycles with economic weakness.
If history is a guide, the latest easing cycle, if extended, could be accompanied by a drop in share prices and an increased demand for anti-risk assets like JPY.
The Federal Reserve delivered a third 25 basis point rate cut of 2019 at Oct.30 but signaled a pause in easing cycle. The US stocks rose with the S&P 500 index hitting a record high of 3,050 on Wednesday before falling 0.30% on Thursday.
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