Week ends positive on US Fed plans to cut interest rates

The US stock market rallied on news that the Federal Reserve is going to cut interest rates starting next month. Why does the market think this is good? 4 reasons.

1. Lower Borrowing Costs: Companies can borrow more cheaply, leading to increased investment and potential earnings growth.
2. Increased Consumer Spending: Cheaper loans encourage consumers to spend more, boosting company revenues.
3. Shift to Stocks: Lower bond yields push investors to seek higher returns in the stock market.
4. Economic Support: A rate cut signals Fed action to stimulate the economy, increasing market confidence.

What are the potential drawbacks of a rate cut?

1. Inflation Risk: Excessive borrowing can drive up inflation.
2. Asset Bubbles: Cheap money may inflate stock and real estate bubbles.
3. Weaker Currency: Lower rates can devalue the currency, increasing import costs.
4. Reduced Savings: Lower returns hurt savers and retirees relying on interest income. The 10-year Treasury yield was down to about 3.8% today, near the lowest this year so far.
5. Limited Fed Tools: Frequent cuts leave less room for future economic support.

The market is obviously leaning more on positive outcomes, but note that we are very near this year’s highs established on 16 July. Here at DeepCap, we like high probabilities and buying in at this level doesn’t inspire a high probability of beating the market.