The impact and shifts of historical interest rate cuts on the market❗️

🥇The impact of interest rate cuts in the United States on the stock market requires an analysis that goes beyond the simple traditional logic of 'rate cuts are always good' in the current cycle (2024-2025). This round of interest rate cuts occurs against a complex backdrop of economic 'quasi-stagflation', questioning the independence of the Federal Reserve, and a restructuring of global patterns, leading to more structural, asymmetrical, and uncertain effects.

To more accurately grasp their impact, the key lies in understanding three core paradigm shifts.

Shift 1: The macro background changes from 'pure recession prevention' to 'balancing stagflation risks'

The fundamental difference between the current cycle and historical interest rate cut cycles lies in the macroeconomic context. Traditional rate cuts typically respond to deflationary or recessionary risks, whereas this round of cuts attempts to seek a balance between 'economic slowdown' and 'stubborn inflation'.

To more clearly illustrate this uniqueness, here is a comparison of this cycle with historical typical preventive rate cuts:

Comparison dimensions: Core policy objectives.

· This cycle (2024-2025): Difficult trade-offs between stimulating employment and curbing inflation.

· Historical typical cycle (e.g., 1995): Focused on stimulating the economy and employment, with mild inflationary pressures.

Comparison dimensions: Inflation environment.

· This cycle (2024-2025): Core PCE remains around 3%, with rebound pressure.

· Historical typical cycle (e.g., 1995): Inflation rate is mild (around 2.83%).

Comparison dimensions: Market expectations.

· This cycle (2024-2025): Highly differentiated and unstable, greatly affected by data and political interference.

· Historical typical cycle (e.g., 1995): Easy to form a consensus expectation, with significant policy effects.

Comparison dimensions: Policy space and effects.

· This cycle (2024-2025): Limited space, effects partially offset by high valuations and supply chain issues.

· Historical typical cycle (e.g., 1995): Ample policy space can effectively boost market confidence and the stock market.

This 'quasi-stagflation' background makes the Federal Reserve's policy dilemma: cutting rates too slowly may exacerbate economic decline and harm corporate profits; cutting too quickly may reshape inflation expectations, forcing a more aggressive tightening of policy in the future, thus bursting asset bubbles. This significantly reduces the stimulative effect of rate cuts on the stock market and may even turn negative in the short term due to concerns about inflation.

Change two: Policy transmission shifts from 'clear and predictable' to 'complex and distorted'.

The transmission mechanism of rate cuts to the stock market is being severely disrupted by three unprecedented factors:

1. The credibility of policies faces dual challenges:

· Independence is impaired: The political pressure from the White House on the Federal Reserve has been made public, as staff appointed by Trump simultaneously serve on the Federal Reserve Board, creating a precedent that affects the independence of the central bank's personnel. The market begins to question whether the Federal Reserve can still make independent decisions based on economic data.

· Internal divisions are made public: There is a high degree of divergence within the Federal Reserve regarding policy path expectations, seriously undermining the efficacy of its forward guidance. For example, there is a significant gap between the Federal Reserve's internal forecasts and market expectations regarding the number of rate cuts in 2026.

2. Decision-making is caught in 'data fog': A rare long government shutdown has led to delays or omissions in the release of key inflation and employment data. The Federal Reserve's rate decision in October is the first in decades made without key official data. This forces decision-makers to rely on lagging or non-traditional private sector data, increasing the risk of misjudgment.

3. The market itself forms 'reflexive constraints': The bond market has already significantly priced in rate cut expectations, leading to a notable decline in long-term Treasury yields. This spontaneous easing of financial conditions has, to some extent, 'prepaid' the effects of rate cuts, which may make the Federal Reserve more hesitant when it is truly necessary to cut rates.

Change three: Market impact shifts from 'universal easing' to 'highly structural differentiation'.

In this complex background, the benefits of rate cuts to the stock market are difficult to transmit evenly, rather exacerbating structural differentiation between sectors and regions.

1. Within US stocks: The divide between profit-driven and interest rate-sensitive sectors.

· Technology stocks: Will benefit more from their own profit cycles (e.g., the wave of investment in artificial intelligence) rather than purely from interest rate declines. Liquidity easing is a 'catalyst' rather than the 'main engine'.

· Financial stocks: Complex impacts. The narrowing of net interest margins poses pressure, but if rate cuts successfully stimulate loan demand, it may form a hedge. Their performance depends more on the actual quality of the economic 'soft landing'.

· Consumer stocks: Defensive characteristics of essential consumer goods are highlighted; discretionary consumer goods are sensitive to whether rate cuts can truly boost the actual income and confidence of middle- and low-income groups.

2. Global stock markets: From the story of 'hot money inflow' to the logic of 'relative value and hedging'.

Traditionally, US interest rate cuts drive capital flows to emerging markets. However, there are two key changes in this cycle:

· Structural change in capital flows: Some funds have indeed flowed out of the US stock market, but the main destinations are US domestic bonds and currency markets, rather than a large influx into emerging stock markets. The scale of funds flowing to non-US stock markets is relatively limited.

· Emerging markets become more selective: Funds will favor markets with independent economic growth logic, reasonable valuations, and low reliance on external financing. For example, the Indian stock market, benefiting from internal tax reforms and consumption recovery expectations, and the Chinese stock market, which is at a low valuation and has sustained policy support, may be more attractive than economies reliant on commodities and external debt.

· Beware of 'reverse shocks': If US rate cuts stem from an unexpected deterioration in its economy, it may have negative spillover effects on global stock markets through trade and sentiment channels, offsetting the benefits of capital inflows.

Future scenario extrapolation and asset allocation insights.

Based on the above analysis, the future direction of the stock market will heavily depend on the following two scenario paths:

· Scenario one: The Federal Reserve maintains a 'cautious prevention' stance (high probability).

The Federal Reserve withstands pressure to cut rates at a slower pace and smaller magnitude. This has limited short-term boosts to the stock market, which will continue to be volatile. However, if this successfully extends the economic cycle and avoids inflation rebounds, it will be beneficial for the medium- to long-term health of the stock market. At this time, it is advisable to overweight sectors with high profit certainty (e.g., technology) and pay attention to non-US markets with reasonable valuations (e.g., Asian markets excluding Japan).

· Scenario two: The Federal Reserve shifts to 'aggressive relief' (low probability but high risk).

Under political pressure for rapid rate cuts. This may strongly stimulate the stock market in the short term, especially for sectors with high valuations. However, it could likely trigger a sharp decline in the dollar and decouple inflation expectations, ultimately forcing the Federal Reserve to make a sharp reversal, leading to more severe market volatility or even declines. At this time, it is advisable to increase holdings of anti-inflation assets such as gold and reduce overall risk exposure.

In summary, in this special interest rate cut cycle, simple historical analogies have become ineffective. Investors need to pay more attention to the substance of economic data, the true state of the Federal Reserve's independence, and the endogenous growth dynamics of various markets and sectors, cautiously positioning themselves within a landscape of structural opportunities and systemic risks.