Hi YXI friends,

Everywhere I look, there is chatter about today’s FOMC being a “sell-the-news” event.

When everyone expects to sell the news, the market is unlikely to respond exactly according to the consensus.

Today, I am offering a contextual review of the upcoming rate cut by the Fed. We will examine the macro data closely, as well as the historical performances of key assets across equities, bonds, gold, and crypto during the past recession cycles.

This way, we actually have a playbook for every asset based on real history, rather than the fuzzy notion of “it’s gone up a lot, market must be selling the news here”. How many times have we heard that in the last 3 months?

Please take your time reviewing every chart I’ve put in this playbook - it’s all for free today.

Table of Contents

• 1. FOMC Projections

• 2. Is The Cut Justified?

• 3. Cutting Into All-time Highs

• 4. S&P 500 and Nasdaq (SPY & QQQ)

• 5. 20+ Year Treasury Bond ETF - TLT

• 6. Crypto

• 7. Gold

• 8. Large Cap Equities

  • Apple: AAPL

  • Amazon: AMZN

  • Alphabet: GOOGL

  • Meta: META

  • Microsoft: MSFT

  • Nvidia: NVDA

  • Tesla: TSLA

  • Palantir: PLTR

• 9. Selected ETFs

  • Semiconductor: SOXX

DISCLAIMER: This newsletter is intended for educational purposes only. Any information or analysis in this note does not constitute an offer to sell or a solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice, nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.

Please check out our glossary for explaining the acronyms, financial terminology, and economic data.

1. FOMC Projections

We utilize the Fed Funds futures market to gauge market expectations for future FOMC interest rate decisions.

Going into the September meeting, the market has pinned a 100% chance of a 25bp cut.

While many wish for a 50bp cut, it will just be that - a wish. The Fed does not like to surprise the market, and if it wanted to cut more, we would have heard about it from WSJ on Friday.

US Treasury Outright Yield Curve

The curve is now relatively flat at the front end, with the 30-year rate sitting about 1% higher than the 1-year rate.

2. Is The Cut Justified?

US Nonfarm Payrolls & Unemployment

With heavy downward revisions of the prior months’ data in the last two Nonfarm Payrolls, the Fed is now concerned about the weaknesses of the labour market. June even showed up with a net loss of jobs.

Historically, when unemployment starts to rise, it tends to move up quickly. In 2001, the unemployment rate moved from 4.3% to 5.7% in just 9 months. In 2007-2009, unemployment went from 4.4% to 10% in just 2 years.

A sharp rise in the unemployment rate is typically accompanied by a recession, i.e., a drop in the GDP.

This, of course, is not coincidental - GDP is correlated with labour productivity and hours worked.

Powell does not want to be remembered for acting too late yet again in preventing a recession.

What about inflation? It is still well above the Fed’s goal of 2%.

The Fed may take comfort in the above chart.

Historically, the Effective Fed Funds Rate (orange) rarely stayed above CPI for too long. Currently, there is a 140bp gap between the EFFR and Headline CPI, and a 170bp gap between the EFFR and the Headline PCE from July.

(The Fed’s goal is set for PCE, but in reality, it places great emphasis on the CPI.)

The gap between EFFR and CPI/PCE indicates some headroom for the Fed to lower rates for the benefit of the labor market.

3. Cutting Into All-time Highs

Cross-asset snapshot

Almost all of the assets under our coverage, except USO and AAPL, have made positive returns YTD. The likes of GOOGL and META have generated returns of over 30% in a year that saw the S&P 500 briefly enter bear-market territory.

All of the assets are above their 200-day MAs too, in a medium-term bullish trend.

SPY and QQQ have just made new all-time highs this week - a feat that defied the expectations of most institutional investors from less than half a year ago.

This won’t be the first time that the Fed cuts rates into the stock market's all-time highs. As recently as 2024, SPY was already at the ATH made in July when the Fed cut.

In the following sections, we will examine the behavior of equity indices, bonds, cryptocurrencies, gold, and Mag-7 stocks during the start of the past rate cut cycles since 2007.

4. S&P 500 and Nasdaq (SPY & QQQ)

SPY

There were four cutting cycles - if you separate the 2019 cuts from the COVID cuts - since 2007.

As 2007 and 2020 were recession-induced cuts, which were a different macro context from today, I would focus on the 2019 (trade war) and 2024 (labour market concern) cuts.

In both cases, the stock market was relatively flat in the next week, but rose within the next 3 months (63 trading days).

Interestingly, the September 2024 cut induced better returns, likely because of its jumbo size (50bp).

QQQ

QQQ rose by 3% in the 3 months after the August 2019 cut, versus 11% after the 50bp cut in September 2024.

5. 20+ Year Treasury Bond ETF - TLT

TLT

TLT typically rose after the beginning of a cutting cycle. As yields go lower, bond prices move up. However, September 2024 was an exception - TLT fell in the immediate week, as well as in the 1 and 3 months following the start of the cutting.

6. Crypto

BTC

Bitcoin saw an immediate boost in 2019, but it fizzled out a month later.

In 2024, Bitcoin rose within the 1-week, 1-month, and most significantly the 3-month periods.

ETH

ETH actually did poorly after the 2019 cut, but managed to catch the rally with Bitcoin in 2024.

7. Gold

GLD

GLD performed well immediately after the August 2019 and September 2024 cuts, but was relatively muted.

The 2007 financial crisis induced a big jump in GLD prices 3 months later, as investors sought a safe haven.

8. Large Cap Equities

Apple: AAPL

Interestingly, AAPL doesn’t react too positively immediately after the cut, but tends to do well 3 months later.

Amazon: AMZN

AMZN fared poorly during the 2019 trade war induced cut, but did very well in Q4 2024.

Alphabet: GOOGL

Historically, GOOGL didn’t benefit from the cuts immediately. However, it did join the post-election rally in 2024.

Meta: META

META wasn’t listed during the GFC. Its immediate results were mixed during the 2019, 2022, and 2024 cuts.

Microsoft: MSFT

MSFT didn’t benefit from the cuts in the immediate aftermath, between 2007 and 2024.

Nvidia: NVDA

NVDA shot up immediately following the September 2024 cut. However, in 2019, NVDA didn’t do well until 3 months later.

Tesla: TSLA

TSLA received a slight boost in the weeks following the 2019 and 2024 cuts, but performed poorly over the subsequent one-month period. Nonetheless, the 3-month returns were spectacular.

Palantir: PLTR

PLTR only has one cut to refer to in 2024. It did pretty well both in the 1-month and the 3-month periods after. It then went on a monster run this year too.

9. Selected ETFs

Semiconductor: SOXX

SOXX’s experience was very mixed in 2019 and 2024.

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