It wasn’t long after the U.S. Federal Reserve cut short-term interest rates by 50 basis points on Tuesday that some investors began to wonder if the U.S. economy is in deep trouble – and stocks could be headed toward another bout of volatility.
However, Tobias Levkovich, chief U.S. equity strategist at Citigroup, believes the rate cuts are good news for equities, especially after Tuesday’s sharp rally.
“[Tuesday’s] very positive reaction to the Fed’s decision to cut short-term interest rates may be seen as a ‘relief rally’ to many market participants and an opportunity to sell more stocks for bearish investors,” he said in a note to clients. “However, a study we conducted a number of weeks ago suggests that such big daily upside moves are actually quite helpful as determinants for future appreciation potential based on history.”
He said that one-day rallies in the S&P 500 that are greater than 2% – Tuesday’s rally was 2.9% – are usually followed by strong markets over the next few months. What’s more, this week’s rate cuts show that the Fed understands the risks to the economy and is willing to step in with further cuts, which makes equities look good over the next six to nine months.
“While investors might be worried that home price weakness will curb consumer confidence and spending, we would remind investors that consumer confidence is a very unreliable lead indicator for overall stock price direction and is almost meaningless for predicting even retailing stock prices,” Mr. Levkovich said.