Trader’s Narrative

Most people assume automatically that a sustained interest rate cut campaign by the Federal Reserve has obvious consequences for the stock market, the dollar, commodities and gold.

The common line of thinking goes that interest rate cuts will help the market, by making equities more attractive relative to bonds, hurt the dollar by making it less attractive in the currency market, push up inflation - in other words, boost the price of commodities, and naturally then, push up the price of gold.

Myth Busters
But is any of that actually true? Does the real market history bear similar witness or are these assumptions… nothing more than myth?

Jason Goepfert of Sundial Capital (SentimenTrader.com) looked at the 8 instances since 1971 where the Fed embarked on an interest rate cutting rampage. He then looked at what effect that had on the various markets.

What?
The results are surprising. Interest rate cuts are good for the stock market. But that’s where the easy thinking ends.

The US dollar, in contrast to all you’ve heard, actually was the better for such slashing of rates. Commodities and gold were the poorer for it. And the long side of the bond market was mixed.

These results are aggregate data, smoothing out each year, of course. And we could have an aberration to the general tendency and see the dollar tank further, gold go up and stocks go down. Anything can happen in the markets.

Here are the graphs for 2001 as an example of the 8 instances:

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