The Federal Reserve's December meeting first talked about "interest rate cuts", and the market was moved by the news, leading to loose pricing in advance. Has the market gone too far before the implementation of interest rate cuts? We have reviewed the performance of major asset classes before and after various interest rate reduction cycles, attempting to provide investment reference for this round of easing.
The stock market: who has the upper hand in valuation and profitability depends on the way the economy is going down. For the US stock market itself, during a soft landing, the market pre priced and liquidity was loose, leading to an increase in growth over value; But if a crisis occurs, lowering interest rates will also be difficult to stop the decline. For the relative performance of global stock markets, fundamentals are a more important determining factor, and the Chinese stock market performs better than the overall performance of emerging markets in the loose cycle.
Bond market: The race is mainly ahead of interest rate cuts. From the end of interest rate hikes to the start of interest rate cuts, US Treasury bonds are priced more leniently, with higher returns than after the start of interest rate cuts; The marginal economic recovery may trigger a slight pullback in US Treasury bonds.
US dollar: reflects the relative strength of the US and European economies and monetary policies. The US dollar tends to decline with the expectation of loose monetary policy from the Federal Reserve, but if the US economy is relatively strong compared to non US countries, then the US dollar is not weak.
Commodity: deviates from the trend of the US dollar, but also depends on other attributes. During the interest rate reduction cycle, gold and crude oil mostly rose due to the weakening of the US dollar, and gold may have stronger performance in a hard landing mode; Crude oil is more sensitive to supply and demand factors.
What is the difference in this round? In 2024, the US economy and inflation may exhibit a fluctuating downward path, which makes the Federal Reserve more cautious, and the observation window may continue until after the current market pricing of interest rate cuts; On the other hand, there may be some refraction in the monthly/quarterly economic data, causing the current strong market to face a slight correction. From an external perspective, the narrowing of the relative economic gap between the United States and Europe in 2024, as well as the adjustment of the Bank of Japan's monetary policy, may drive the weakening of the US dollar. However, there is still uncertainty about the sequence of the US and Europe's monetary policy shift and economic recovery, which may bring setbacks to the downward process of the US dollar.