The hope for interest rates cuts on Wall Street – this time it could be misleading

Two scenarios of what will happen on the markets!

Even if the hope for interest rate cuts, i.e. the supply of cheap money (the monetary factor) almost inevitably leads to rising share prices, things could turn out differently this time.

What are Wall Street investors hoping for?

Now that the global economy is cooling down, the first signs of a downturn can also be seen in the USA (labour market) and Fed Chairman Powell recently left all options open. Equity investors are presumably assuming the following scenario:

The economy will weaken in 2019. Current corporate earnings expectations for this year are plus 3 percent and the Fed will lower interest rates in the near future. For 2020 the market is already expecting companies to grow their profits again by 12 percent.

This has resulted in a contradictory situation that investors should not like in the medium term:

  • Scenario 1: The central bank will not lower the key interest rate in the coming months because the economy is still too stable. Or because Fed boss Powell wants to prove that he doesn’t have to be called a beginner by Donald Trump and that the central bank is independent of instructions. As a result the hopes for interest rates cuts that have been priced in are being priced out again.
  • Scenario 2: The central bank cuts interest rates promptly. This makes one thing clear. The economy is weakening more strongly and moving towards recession. What happened in the last two economic cycles? In both 2001 and 2007, interest rates and share prices plummeted at the same time with a low time lag.

Conclusion

Both scenarios could form the basis for a price decline – the so frequent summer slump. Either by disappointing investors or by a serious economic problem in the 11th year of the upswing. And there is someone else who could accelerate the scenario, a hardly predictable leader whose slogan is: Me, myself and I !

By AgnosticPreachersKid – Own work, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=6282818
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