We all know that the US is now forced to move into an interest rate cutting cycle in 2024 and 2025 as their Federal debt is $35 trillion and they are paying $1 trillion a year in interest and are being forced to raise $200 billion a month in bond issuances just to survive from a cash-flow perspective – not a healthy picture in my opinion.

The 7 shares / (out of) 500 shares dragging the SP500 from a net negative annual return for the 2023 year (in late October 2023) to a positive return is also not “healthy” technical activity as that is called negative breadth in share terminology and is generally a warning sign to a rather severe correction or reversal of fortunes.  i.e. when only a few shares cause the massive index to rise when the majority of shares in the index are negative to flat or declining.

So, considering the rate cutting cycle being imminent and the negative breadth on the rising SP500 (now at record highs) – we then look at what happens in a rate cutting cycle historically:

1. Below is a chart of the rate cutting cycles (depicted in pink) from 1970 to date in the USA and those rate cutting cycles impact on the sp500 index.

2. The red bar below each rate cutting cycle depicts what the sp500 did in respect of index performance in that rate cut cycle. (Note: the world equity markets get affected by the sp500 equity market moves) as it is the largest economy in the world.

3. The average return of the SP500 over the last 8 rate cutting cycles is a negative 18.50% AND with dropping of highest and lowest of the 8 cycles measured to make it a better sample by dropping the 2 outliers – it is a negative -28.60%!

4. More importantly in every rate cutting cycle in the US the SP500 has generated a negative return in that cycle – historically 8/8 times in 63 years.    It is not a question of if the US is going to start cutting rates BUT more about how many times in 2024/2025 as the market is pricing anywhere from 2 to 4 rate cuts now in 2024 with some saying even more (6 over 18 months) to mid-2025 – was priced recently.

5. Most think rate cuts cause shares to rise (makes economic sense; I use to think this as it means the average consumer has more money in their pocket to spend) BUT the evidence is 100% to the contrary as per below. The actual psychology is that consumers get scared as they think that there is something wrong with the economy that the FED is now cutting interest rates to stave off a recession and thus, they start saving and moving money into money market funds to protect their capital – which causes equity markets to retrace & fall.

6. The FED is thus caught between the devil and dark blue sea with interest rates as they are forced to cut to pay less interest on their $34 Trillion of debt & the various US banks are technically bankrupt (5 US banks went under in 2023)  – most notable a big one called Credit Suisse; with such large US bond holdings on their balance sheets which are showing unrealized losses of 30% to 35% currently (and nobody is seemingly worried) ;   plus the US is entering a recession (PMI for services and manufacturing are below 50 for 3 quarters now) which will then force rate cuts to stimulated the over debited consumer.

7. Credit Suisse may have been the Bear Sterns warning of 2009 for the 2024 black swan event. The failure of Credit Suisse in May 2023 was swept under the carpet along with the 5 US banks that went under (The Swiss National Bank ordered UBS to takeover Credit Suisse then it all went quiet just like Bear Sterns). In 2008 Bear Sterns went under and it was swept under the carpet 9 to 10 months later Lehman’s brothers happened and we had the GFC, and the global and local share markets dropped 48% in 4-5 months.

8. Credit Suisse may have been our Bears Sterns warning in May 2023.