Continuing the thought from my last post asking whether Fed Rate Cuts are Actually Good for the Market, I thought I’d compare the 2 Year Treasury Note, 30 Year Treasury Bond, and the S&P 500 and overlay the recent Fed Rate Cuts on the comparison chart.

Let’s see what happened:

The chart begins in June, 2007, when the Fed announced that it would likely stop raising interest rates for a period, and in fact, may begin cutting soon.

The Fed cut rates .50 basis points on August 17^th, and then cut five additional times which have been marked on the chart with black lines at the bottom.

Notice how the S&P 500 responded to the first rate hike – with a euphoric 7% rally (which also experienced another rate cut). Notice also how the market topped at this point and began its violent downward descent from October 2007.

Notice also the 2 Year Note (green) and the 30 Year Bond Price (blue) and how they both responded to the first rate cut.

Bond prices move inversely to bond yields, meaning that if you bought a bond ETF or actual treasury notes/bonds, then not only did you experience appreciation from the monthly yields, but also from the fact that the prices actually rose in your favor as well (as could be expected in a period of falling yields).

I mentioned previously that it seems like everyone on the Street gets euphoric when the Fed cuts rates, but I vehemently disagree. The fact that the Fed is cutting rates is often a sign that the Fed and economists fear weakening economic conditions more than they fear inflationary concerns, and so they’re willing to ease monetary policy in response to deteriorating economic conditions.

Does the Fed also respond to the market? Yes, as evidenced by the surprise .75 cut on January 22^nd. But even that drastic of a cut had little relative effect on the market.

Nevertheless, the actual strategy appears to be exit the market when the Fed begins a campaign of lowering interest rates and buy bonds/notes. Aggressive traders could have even decided to short the US Market, but smaller investors would be better off buying bonds during a campaign of Fed Rate Cuts instead of jumping aggressively into the market as Wall Street would have you believe.