With all the talk leading up to last week’s rate cut, it became a forgone conclusion that interest rates would fall. People forget, however, that the Federal Reserve only has control over the short end of the yield curve, and as one moves further out on the curve, the Fed’s control diminishes. At the long end of the curve, rates haven’t declined; they’ve actually seen relatively large increases.The chart below shows how much 10-year yields moved in the days after the first cut of prior Fed easing cycles. In each of the bars below, we show the change in the 10-year yield from the close on the day before the first cut to where it closed seven trading days later (in the case of the current period that would equate to the period from the close on 9/17 through 9/26).While longer-term interest rates tended to decline in the days that followed prior cuts to kick off easing cycles, the current period is one of just three when 10-year yields increased. The only other periods where yields also increased were following the cuts to kick off the 2001 and 2007 easing cycles.
To compare the change in yields in the current period to the 2001 and 2007 periods, the charts below show the 10-year yield in the six months before and after the first cut in each of the two prior cycles versus the 10-year yield over the last six months.For both periods, there are some similarities between the patterns leading up to the first cut. In each one, yields fell sharply in anticipation of the first cut (or the looming recession) and bounced when the Fed cut as investors became confident in the Fed’s ability to stave off a recession. In both cases, the bounce was short-lived, and yields quickly resumed their downward trajectory.
Given the similarities between the direction of yields, we were also curious to see if the path of the S&P 500 now had any similarities to the 2001 and 2007 periods. Starting with the period surrounding the 2001 cut, the patterns are nearly complete opposites. Whereas the S&P 500 was already plummeting after the dot-com peak in 2001, it’s at record highs now. The S&P 500’s performance in 2007 looks a bit more similar. In both cases, the S&P 500 experienced a moderate pullback in the weeks leading up to the cut and started recovering in advance of it. While the S&P 500 has already hit a new high since the Fed cut rates last week, in 2007 it took about three weeks for the index to get back to its prior highs. The new high didn’t last long, though, and within six months, the S&P 500 was near bear market territory with a decline of over 18%.
While the price charts of the S&P 500 now versus the period leading up to and after the 2007 rate cut look similar, breadth was notably weaker back then.As shown in the chart below, in 2007 (top chart), the S&P 500’s cumulative A/D line peaked in the spring, and as the S&P 500 made a new high in the summer, breadth made a lower high.Then again, October’s higher high was accompanied by a lower high in the cumulative A/D line.For the current period, the S&P 500’s cumulative A/D line looks different than it did back then.This time, breadth has led prices to new highs, indicating a healthier underlying trend.Whether that positive breadth trend continues remains to be seen, but for now even as the S&P 500’s performance in the last several weeks has been similar to its performance around the 2007 cut, there are some notable differences.
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Higher Interest Rates?
