It finally happened

Excitement, eagerness and maybe a bit of anxiety are emotions that come with the territory of a highly anticipated event. But today, we are not talking about weddings, championship games or big birthdays. No, in this week’s Top Market Takeaways, we are covering the “need to knows” from one of the most anticipated economic events of the last few years: the Federal Reserve (Fed) finally cutting interest rates (after 420 days without a move, but who’s counting?).

It was certainly exciting, at least to us.

On Wednesday, the Federal Reserve cut its policy rate by 50 basis points to 4.75%–5.00% from 5.25%–5.50%. Immediately following the announcement, stocks made an intra-day all-time high, and the S&P 500 closed at its 39th all-time high of 2024 (and first since mid-July) yesterday. The index is up 20% since the start of the year.

While the interest rate cut matters for deposit and savings accounts, short-term certificates of deposit and money market yields, bond markets were already expecting a big shift in policy. That means that even though the Fed has officially kicked off the rate cutting cycle, you may not see much movement in places like mortgage rates. Indeed, mortgage rates have already declined by about 100 basis points from their year-to-date highs. Further, 10-year Treasury bond yields have actually moved higher over the past few trading sessions.

When it was all said and done, the Fed remained the primary focus of the week. Read on to get the skinny on what happened, what we can learn from rate cutting cycles of the past and what it all could mean for your portfolio.

The Powell pivot

1. What happened at the September Federal Open Market Committee (FOMC) Meeting? The Federal Reserve changed their policy stance to ensure that the economic cycle continues.

A 50-basis point move sends a clear message that the Fed wants to support growth. But a bigger move should not be taken as a sign of bigger problems in the economy.

Powell said it himself in his news conference, explaining that this policy pivot is a “recalibration.” In other words, the decision to cut interest rates is a normalization of monetary policy from a restrictive level and not an urgent shift to combat a crisis.

Powell added that, “the U.S. economy is in good shape...It’s growing at a solid pace. Inflation is coming down. The labor market is in a strong place. We want to keep it there. That’s what we’re doing.”

We agree. We are focused on the path of monetary policy from here, taking the risks in context.

Despite some stabilization, the recent slowing in the labor market now stands as a bigger risk than inflation. The unemployment rate is still low at 4.2%, but that is up from 3.7% at the start of the year. In the Summary of Economic Projections (SEP) released yesterday, Fed officials forecasted unemployment to move up slightly to 4.4% in the fourth quarter of 2024 – and remain there through the end of 2025.

Rate cuts stand to oxygenate the economy and support the labor market. They are designed to ensure this economic cycle continues. The median FOMC participant is penciling in 50 basis points of further cuts across the remaining two meetings this year. We are aligned with that view.

2. What can we learn from history about cutting cycles?

• The Fed could deliver a lot of rate cuts. We think the Federal Reserve is likely to achieve a soft landing. The average soft landing cutting cycle over the past 53 years has seen about 200 basis points of easing, but in the “modern” era it has only been 75 basis points. This cutting cycle, if it meets expectations of another 200 basis points of easing through 2025, will be the deepest “soft landing” cutting cycle since 1984-1986.
• Today’s labor market is in line with past cutting cycles. Over the last seven cutting cycles, the median three-month moving average number of jobs added to the economy was 116,000 per month. Where does that metric stand today? 116,000 jobs added per month. Undoubtedly, the labor market is slowing but easier monetary policy should support labor markets before a more aggressive slowdown in growth hits the economy.
• Stocks and bonds tend to do well.
  • Stocks: Since 1980, five of the 10 best years for the S&P 500 happened when the Fed was cutting rates without a recession (1985, 1989, 1995, 1998, 2019). The Fed has cut rates 12 times when the S&P 500 was within 1% of its all-time high. The market was higher one year later all 12 times (with a median return of 15%).
  • Bonds: Since 1970, high quality bonds have outperformed cash by an average of 10% in cutting cycles.
• But above all, cutting cycles hurt cash. If there is one thing we can learn from past rate cutting cycles, it is that cash is likely to underperform as yields fall. In all but two of the last 12 cutting cycles, bonds have outperformed cash.

3. What could it mean for your portfolio? We do not think the start of the easing cycles means that you have missed “it.” Instead, we encourage investors to use the rate cutting cycle to their advantage: starting with assessing outsized cash positions.

Cash is a necessary part of any lifestyle. Many think of cash as a safe haven or even a source of income when interest rates are high. But cash isn’t designed to beat inflation or produce long-term returns. Even if policy rates settle in a higher range than the last cycle, today’s elevated cash yields won’t last forever.

We believe better opportunities outside of cash exist today, especially for long-term investors looking to grow and compound their wealth over time. Bonds, for example, may provide consistent income and downside protection while equities may stand to provide long-term capital appreciation.

Your J.P. Morgan advisor is here to help.

All market and economic data as of 09/20/2024 are sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

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The information presented is not intended to be making value judgments on the preferred outcome of any government decision or political election.

The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to "stock market risk" meaning that stock prices in general may decline over short or extended periods of time.

In general, the bond market is volatile and bond prices rise when interest rates fall and vice versa. Longer term securities are more prone to price fluctuation than shorter term securities. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss. Dependable income is subject to the credit risk of the issuer of the bond. If an issuer defaults no future income payments will be made.

Investors should understand the potential tax liabilities surrounding a municipal bond purchase. Certain municipal bonds are federally taxed if the holder is subject to alternative minimum tax. Capital gains, if any, are federally taxable. The investor should note that the income from tax-free municipal bond funds may be subject to state and local taxation and the Alternative Minimum Tax (AMT).

Diversification and asset allocation does not ensure a profit or protect against loss.

Index definitions:

JPMAM Long-Term Capital Market Assumptions: Given the complex risk-reward trade-offs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations. Please note that all information shown is based on qualitative analysis. Exclusive reliance on the above is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. Note that these asset class and strategy assumptions are passive only – they do not consider the impact of active management. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The outputs of the assumptions are provided for illustration/discussion purposes only and are subject to significant limitations.

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IRA- Green Economy: JPM IB Stock Analysts identified US companies likely to benefit from Green/EV/Climate provisions of the Inflation Reduction Act. These companies are expected to benefit from the multi-year spending outlays within the bill. Constituents are heavily tilted towards Industrials and Utilities sectors. Liq Weighted on construction.

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The Russell 3000 Index is a capitalization-weighted stock market index that seeks to be a benchmark of the entire U.S. stock market. It measures the performance of the largest 3,000 U.S. companies representing approximately 96% of the investable U.S. equity market.

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The Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

The S&P 500 Equal Weighted Index is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight – or 0.2% of the index total at each quarterly rebalance.

The Magnificent Seven stocks are a group of influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.

The Magnificent 7 Index is an equal-dollar weighted equity benchmark consisting of a fixed basket of 7 widely-traded companies (Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta, Tesla) classified in the United States and representing the Communications, Consumer Discretionary and Technology sectors as defined by Bloomberg Industry Classification System (BICS).

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The S&P 500 index is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Bonds are subject to interest rate risk, credit, call, liquidity and default risk of the issuer. Bond prices generally fall when interest rates rise.

Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941–43 base period.

The Bloomberg Eco Surprise Index shows the degree to which economic analysts under- or over-estimate the trends in the business cycle. The surprise element is defined as the percentage difference between analyst forecasts and the published value of economic data releases.

The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.

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We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

The views, opinions, estimates and strategies expressed herein constitutes the author's judgment based on current market conditions and are subject to change without notice, and may differ from those expressed by other areas of J.P. Morgan. This information in no way constitutes J.P. Morgan Research and should not be treated as such. You should carefully consider your needs and objectives before making any decisions. For additional guidance on how this information should be applied to your situation, you should consult your advisor.

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• In general, the bond market is volatile and bond prices rise when interest rates fall and vice versa. Longer term securities are more prone to price fluctuation than shorter term securities. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss. Dependable income is subject to the credit risk of the issuer of the bond. If an issuer defaults no future income payments will be made.
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• Investors should understand the potential tax liabilities surrounding a municipal bond purchase. Certain municipal bonds are federally taxed if the holder is subject to alternative minimum tax. Capital gains, if any, are federally taxable. The investor should note that the income from tax-free municipal bond funds may be subject to state and local taxation and the alternative minimum tax (amt).
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