Money & Markets - UBS: Interest Rate Cuts Won't Save the Stock Market This Time Around

October 02, 2019

Article by Eugene Townes in Money & Markets

While many have been arguing for the Federal Reserve to continue cutting its key interest rate to provide a boost on Wall Street, UBS argues that rate cuts don’t provide the same stock market boost investors have seen in the past.

The Fed cut its benchmark interest rate twice in the last three months, and the S&P 500 actually dipped slightly since the first cut in July, the first rate cut in more than a decade.

UBS said it doesn’t see a correlation anymore between the S&P 500’s price-earnings ratio and the Fed rate policy because the early 2000s were dominated by low rates.

“Fed rate cuts are not likely to fuel equities higher as they did in the 1990s,” UBS equity strategist Francois Trahan wrote in a note this week. “The Fed-easing rallies of the 1990s were made possible by a strong inverse correlation between interest rates and P/Es. This relationship no longer exists today.”

“Investor sentiment has been resilient in the face of the ISM crossing below 50 in August. We believe this resilience in sentiment is explained by the widespread belief that Fed rate cuts will help support S&P 500 P/Es as they did in the 1990s,” he said.

That sentiment could change though, as new data released Tuesday showed the Purchasing Managers’ Index plummeting to 47.8% in September, its worst reading since June 2009. Anything under 50% is considered a contraction, of which President Donald Trump noted on Twitter, blaming the Fed.

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