The Federal Reserve is expected to cut interest rates several times this year, but the economic backdrop behind these cuts could have very different implications for the stock market, according to the story.
And unfortunately for equity investors trying to bet on the outcome, this factor is not always clear when the central bank begins a cycle of rate cuts.
"The overall performance of the stock market index after the start of the Fed's rate cuts depends on whether the economic slowdown is an economic downturn or a more severe economic downturn," said Maneesh Deshpande, head of US strategy for stocks at Barclays last week.
The data compiled by Barclays show that the S & P 500 is increasing more than 21% annually after the central bank has lowered its rates, which is a protection against what turns out to be a weak spot in the bank. 39; economy. Strategists call this a reduction in the rate of "insurance".
However, the S & P 500 Index shows an average loss of about 17% when the Fed cuts its rates because of what turns out to be a recession.
"In the two previous Fed rate cuts for the first time in 2001 and 2007, we saw a halving of equities," said Ryan Detrick, senior market strategist at LPL Financial. "But the reality is that if you go back in time, you will also be able to witness explosive gatherings after that first cut."
Wall Street will have clues to the Fed's position on the economy and monetary policy on Wednesday after the central bank's monetary policy meeting. Some economists and investors even think that it is possible that the central bank will saber this week. The Fed meeting comes as economic data deteriorates and the current trade war between the US and China weakens the global economy. But it's not clear if it's a patch or not. Barclays' Deshpande said the recent results from the sector conferred points on the previous one.
Manufacturing activity grew at its slowest pace since October 2016 last month. At the same time, job creation slowed to 75,000 in May, well below expectations. The US economy is also expected to grow 2.1% in the second quarter, more than one percentage point below the first quarter.
Meanwhile, China and the United States have not yet concluded a trade agreement. US Secretary of Commerce Wilbur Ross also said Monday that President Donald Trump would be "perfectly happy" to slap additional tariffs on Chinese products.
This has given hope for a relaxation of monetary policy. Market expectations for a July rate cut stood at 84.3% on Monday, according to CME's FedWatch tool. Bets for another rate cut in September were 65%. Traders also expected a 51.9% chance of a third rate cut in December.
Some even think that the Fed could start cutting rates even sooner. Jim Grant, editor of the newspaper's interest rate watchdog, told CNBC's "Squawk Box" channel that the Fed would cut rates at this week's meeting. Diane Swonk, chief economist at Grant Thornton, thinks the Fed should lower rates this week.
But David Lafferty, chief market strategist at Natixis Investment Managers, thinks the market is taking into account too many rate hikes.
"I think the Fed wants to stay on hold, maybe even lower rates once, but I do not think it wants to get close to the market right now," Lafferty said. Two or three cuts "is a Fed in full retreat.It is the Fed that tells you that the recession is imminent.If the Fed can remain on hold or even give the market a taste of what it wants, without withdrawing completely would be favorable for the stocks ".
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