Analysts are expecting the Federal Reserve to cut interest rates in November and December. Most traders are eager to know what this might mean for the markets. Spoiler alert: It’s complicated.
What’s Happening Now
After months of inflation concerns, the Fed is shifting gears. With Inflation cooling t and Unemployment ticking up to 4.2% (based on August 2024 Employment Situation Report from Bureau of Labor Statistics), the Fed is signaling that its focus is no longer just on inflation but also on supporting a cooling labor market.
Many analysts expect the first rate cut to come in November 2024. This would kick off a new era of monetary easing.
Analysts are divided as to whether the rate cuts will be fast, deep cuts, or whether it will be a slow and shallow path, with rates gradually dropping.
How Might This Affect All Three Major Indices?
Because of their different focus and weighting, each index might respond differently. Let’s break it down:
S&P 500 Futures
If the Fed goes slow and steady, it could bolster sectors like tech and consumer discretionary. You might expect a rally here, as these sectors tend to thrive when interest rates fall. There’s a caveat: The cuts can also signal deeper economic concerns. That said, expect volatility.
Dow Futures
With its focus on blue-chip stocks, the Dow could also benefit from lower rates. Corporate profitability might get a boost from reduced borrowing costs, and traders might expect the Dow to edge higher. But again, any signs of a steeper economic downturn might dampen the optimism, so always have that in the back of your mind.
Nasdaq Futures
The tech-heavy Nasdaq could see the strongest upside if rate cuts come through. Lower interest rates mean cheaper borrowing, which is a win for growth stocks—especially in the tech sector. But here’s the kicker: The “AI premium” that boosted the Nasdaq earlier this year has started to fade. This can dampen or even set back the Nasdaq despite lower borrowing costs. So, be cautious about over-valuations.
The Bottom Line
Don’t just watch the Fed; watch what they’re watching. If you’re trading the S&P 500, Dow, or Nasdaq futures, keep your eyes glued not only to Fed announcements but also labor market data, and other economic indicators.
Rate cuts could spur market rallies, but only if they’re seen as a sign of stability rather than economic weakness. It’s a balancing act—and traders ought to buckle up for what might be a bumpy ride.
A Few Tips
- Want to get a peek into what the Fed is thinking? Check the Federal Reserve’s Dot Plot and the CME’s FedWatch tool.
- To keep an eye on the labor market, be sure to follow the Employment Situation Summary every first Friday of the month (aka, the Jobs Report), ADP and JOLTS reports, and of course, the Initial Jobless Claims that are released every Thursday morning.
- Keep an eye on inflation indicators by following the Consumer Price Index (CPI), Producer Price Index (PPI), and the Personal Consumption and Expenditures (PCE) report which happens to be the Fed’s favored inflation gauge.
Please be aware that the content of this blog is based upon the opinions and research of GFF Brokers and its staff and should not be treated as trade recommendations. There is a substantial risk of loss in trading futures, options and forex. Past performance is not necessarily indicative of future results.