History Suggests Recession Follows a 50 bps Cut, But This Time Could Be Different

Here’s a refined summary of yesterday’s FOMC meeting, as reported by the Kobeissi Letter:

• Fed cuts interest rates by 50 basis points for the first time since 2020.
• Two additional 25 basis point cuts expected in 2024.
• Governor Bowman dissented for the first time since 2005, advocating for a 25 basis point cut.
• The Fed expresses "greater confidence" that inflation is trending toward 2%.
• They will "carefully assess incoming data" to adjust their outlook.
• Anticipate 100 basis points of cuts in 2025 and 50 basis points in 2026.
• The much-anticipated "Fed pivot" has officially begun.

However, it’s important to temper celebrations:

Historically, when the Fed implemented its first cut of 50+ basis points:

• On January 3, 2001, the S&P 500 fell about 39% over the next 448 days, leading to a recession.
• On September 18, 2007, the S&P 500 dropped roughly 54% over the next 372 days, coinciding with a 5.3% rise in unemployment and a recession.

Yet, the current landscape differs significantly from 2001 and 2008. The tech sector appears more to be undergoing a correction than a bubble burst, and there is no looming real estate crisis or mortgage meltdown.

So, what’s next for this week?

We may experience a soft landing, and stagflation could emerge as a prevailing theme, with further easing likely. As I often mention in the media, stagflation is a speed bump to recession.

Regardless, I’ll be keeping a close eye on the Retail ETF (NYSE:XRT).

Over 80 I am all in on a bull run in equities.

Under 70, I am cautious, if not bearish, in equities.

What About Commodities?

We have to watch the dollar to see if 100 holds or not.

Unless there is a significant rally, a bounce from here should not be too impactful.

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However, if there is a huge drop under 100, that would reduce Granny’s purchasing power, drive prices higher and give us that stagflation.

For commodities?

We recommend you watch DBC and DBA.

At this point, DBC (article yesterday) must make up its mind.

But DBA looks about to tackle the 2024 highs.

Both will tell you better than anything else where hard assets are going and in turn, inflation.

ETF Summary

(Pivotal means short-term bullish above that level and bearish below)

• S&P 500 (SPY) 560 pivotal
• Russell 2000 (IWM) 210 pivotal 220 resistance
• Dow (DIA) New all-time high and reverse???
• Nasdaq (QQQ) 465 support 477 resistance
• Regional banks (KRE) 57 pivotal and a sector to watch
• Semiconductors (SMH) 230 support 240 pivotal- a crash here not healthy
• Transportation (IYT) 67.00 support-this liked the rate cut
• Biotechnology (IBB) 145 support 150 resistance
• Retail (XRT) 73.50 support 77 resistance
• iShares iBoxx Hi Yd Cor Bond ETF (HYG) Made a new high and closed on the lows of the daily range-keep watching

Written By: Michele Schneider