How the stock market behaves after a Fed pivot
Last week’s 0.50% rate cut by the Federal Reserve signals the start of falling interest rates for months to come. Usually lower rates represent a good sign for the stock market. But because the US economy is slowing down, we are probably witnessing a top forming in the S&P 500. In fact, the last 2 times a rate cutting cycle began with a 0.50% decrease the stock market moved slightly higher for a few weeks before crashing pretty hard over the next few months.
Is now the time to buy bonds again?
Based on history, it appears investing new money in the stock market at this time may be quite risky. But one asset class that could do really well is long term treasury bonds. A passively managed fund that tracks bonds is the iShares 20 Yr Treasury Bond ETF. (TLT on the Nasdaq)
There are a couple of reasons why this ETF should perform well over the next 12 to 18 months.
First is that when the Federal Reserve starts to cut rates, they typically don’t stop after one or two cuts. Instead they continue to cut, often quickly aggressively, for many more meetings.
Below is a chart looking at the Fed’s fund rate going back 30 years. Notice the sudden drops every time the rate moves up and plateaus. This happened circa 2001, 2008, and 2020.
This time is unlikely to be different. The Fed can easily cut another 2.00% by this time next year in 2025. If that happens, TLT will likely go up by a lot. The fund has a weighted average maturity of 25 years. So for every 1% drop in interest rates, TLT’s price should go up by 25%, all other things being equal.
The second reason is a technical signal based on the fund’s recent price action. The chart below is TLT, and each candle stick represents one week. As you can see the fund is now making higher highs and higher lows, which is a bullish sign. Plus, the price is above all the moving average lines.
As long as TLT stays above the 21 exponential moving average line (blue in chart above) then TLT should have a lot of upward potential.
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Random Useless Fact:
Liked your recent YT video and your post here today. I have a brand new CC ETF on my radar HBIL but waiting for a little drop from its initial price which does covered calls on TLT. Hamilton seems at times to release new ETF’s timed with areas of the market they feel are undervalued, and benefit from that sector soon performing well to benefit their ETF, which seems be in line with your thought’s here as well…
Also have you ever thought of posting on the Blossom app as well, you can link your videos and posts from there and get them more exposure for free? Plus your contributions and perspectives would add a new dimension of thoughts IMO to the platform.
Hi Paul. Thanks for being a long term reader. HBIL looks promising. Too early to compare it’s performance with the underlying right now, but it should do well if TLT stays relatively flat. I haven’t heard of Blossom before. Is it like a social media app? I will have to check it out sometime.
hey new to the blog but love the reads
Thanks, Oscar. 😄