FX168 Financial News (North America) News The Federal Reserve cut interest rates when the US stock market was near historical highs, and investors are looking for historical clues to predict the market outlook. #Market Outlook for the second half of 2024#

After the Federal Reserve announced a 50 basis point rate cut, the S&P 500 index briefly exceeded the historical closing record of July 16, but then fell back, ultimately dropping 0.3%. Equity index futures show signs of strong gains, which could lead to another challenge to record levels for the S&P 500 index and the Dow Jones Industrial Average index.

When the stock market reaches or nears historical highs, will a rate cut provide additional momentum for the bull market, or does it signal future trouble? Dow Jones market data has been reviewed.

Data shows that since 1990, the Federal Reserve has cut interest rates a total of seven times when the S&P 500 index reached or neared (within 1%) historical highs (see table below).

(Image source: finance.yahoo)

In these cases, the stock market tends to rise on the decision day - with a probability of 71.4% increase and a median increase of 0.51%. However, six months later, the performance is more complex, with a 57.1% probability of increase and a median increase of 0.62%.

JPMorgan analysts have traced the data back 40 years and found that the Federal Reserve has cut interest rates a total of 12 times when the S&P 500 index is within 1% of historical highs. In the following year, the market has risen in all 12 instances, with an average ROI of around 15%.

This is very interesting, but can it really tell investors how much about the direction of the stock market during a rate-cutting cycle? As numerous market observers have pointed out, this largely depends on the economic background.

"Historically, when the first rate cut arrives, the bond bull market has only occurred halfway. The direction of the stock market is not so clear - entirely depending on whether the Fed successfully avoids a recession, or whether this rate cut is too late, as we have seen in the past," said David Rosenberg, a analyst at Rosenberg, in his report.

"The danger this time," he wrote, "is extreme complacency and broad consensus that the business cycle has been canceled."