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This is how the stock market tends to perform after the Fed cuts interest rates 3 times in a row



Wall Street supports what appears to be almost certainly a third rate cut in so many meetings of the Federal Reserve on Wednesday afternoon.

And while it may be somewhat daunting for policy makers to deliver a different dose of monetary relief to a stock market that is on or near records, history shows that the market tends to expand its profits after three consecutive quarter-quarter interest rates, according to data from LPL Financial (see chart below).

Source: LPL Financial

Check out : 3 Things to see when the Fed meets next week

Read : Meet the lone economist who thinks the Fed might just leave interest rates unchanged

How good has it been during the periods when the Fed delivered a trio of 25 basis points interest rate cuts? They have been spectacular for the period 6 and 12 months following these decisions by the interest rate regulating Federal Open Market Committee.

LPL data shows that the S&P 500 index

SPX, -0.08%

was up 10% six months later and 20% one year out, measured by three initial cuts of 25 basis points in 1975, 1996 and 1998. [19659002] It can be difficult to consider considering high capital gains this year. So far, the S&P 500 index is up 21.3% year-over-year to the Dow Jones Industrial Average

DJIA, -0.07%

is up 16.14%, while the Nasdaq Composite Index

COMP, -0.59%

has had progress of almost 25% over the last 10 months.

"We have seen periods of economic downturns that had three consecutive 25 basis points cuts, late in the mid and late 1990s," said LPL senior market strategist Ryan Detrick. "The good news is that the economy accelerated after the recession and stocks did quite well." He said.

Of course, gains for the US stock market this year may make it difficult for the Fed to rationalize a third cut.

And if a cut is delivered on Wednesday, how the Fed communicates what's going on can do a lot to help influence investor sentiment, Wall Street Journal's Nick Timiraos notes. WSJ said the Fed will tighten its options for further interest rate cuts, in this "insurance cut" cycle – implemented to offset the deleterious effects of the Sino-American trade war and a global economic downturn – as market and US economy seems OK, for now.

The market does not expect another interest rate cut until February after Wednesday's decision.

What is most likely on Wednesday is a so-called "hawkish" cut, where the Fed lowers interest rates as expected, but communicates its intention to hold on to further monetary easing until further signs of economic weakness appear.

It can be disappointing for Wall Street, at least in the short term.


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