Three’s a Winner for Stocks If Fed Cuts Quarter Point, LPL Says

(Bloomberg) -- The Federal Reserve is forecast to cut interest rates for a third time this year by a quarter point, which would be a good sign for stocks if history is any guide, according to LPL Financial LLC.

“We’ve seen periods of economic slowdowns that had three consecutive 25 basis point cuts, most recently in the mid- and late 1990s,” Senior Market Strategist Ryan Detrick said in a note Tuesday. “The good news is the economy accelerated after the slowdowns and stocks did quite well.”

The S&P 500 Index was up more than 10% six months later and 20% a year later after three initial 25 basis point cuts in 1975, 1996 and 1998, Detrick said.

The Fed is expected to cut rates by 25 basis points to provide insurance against global risks, while signaling the committee has probably done enough for now. However, a minority of economists tracked by Bloomberg see the central bank holding steady this time around.

When the Fed started new easing cycles in 2001 and 2007 with 50 basis point cuts, it “implied they were more worried than they were letting on,” Detrick reasoned. Since the cuts so far have just been 25 basis points each, they can easily be viewed as “insurance” as opposed to warding off impending recession.

“As history shows, we don’t have to fear,” Detrick concluded.

To contact the reporter on this story: Joanna Ossinger in Singapore at jossinger@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Andreea Papuc, Cormac Mullen

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