Metis AM
Over the past couple of years, you’ve no doubt experienced the effects of rising interest rates. The cost of living crisis led many central banks around the world to raise rates in a bid to bring inflation back to a more manageable level. Thankfully, these measures seem to be paying off, and banks are now able to consider interest rate cuts.
In September, Morningstar reported that the Federal Reserve (Fed) cut its main lending rate for the first time in four years, dropping it by half a percentage point to 4.75% – 5%. Though US consumers and businesses will likely feel the effects of the cut most acutely, Morningstar reports that it could affect stock markets and investors around the world.
Read on to learn more about what the rate cut could mean for global stock markets and your investments.
Falling interest rates can affect you in a range of different ways
The Fed isn’t the first central bank to begin cutting rates in 2024. On 1 August, the Bank of England (BoE) reduced the UK base rate from 5.25% to 5%, and the European Central Bank (ECB) have so far implemented two rate cuts this year: one in June and another in September.
When interest rates begin to fall, it can affect the economy and stock markets in a few different ways:
- It may be less expensive to borrow money, such as on a mortgage
- The interest rate on your cash savings could fall
- Stock markets may become less volatile.
The impact of interest rate cuts on borrowing and savings accounts will primarily affect consumers in the US. But if you hold US investments – either directly or within a fund – you may feel some of the effects of the rate cut.
US stock markets have responded well to the interest rate cut
When interest rates fall and it becomes cheaper to borrow, it can have a positive effect on businesses. When businesses are able to borrow more to cover debts, improve cash flow, and invest in their operations, they are more likely to grow their profits, leading to higher returns for investors.
This was certainly reflected on the stock market in the aftermath of the Fed’s announcement.
Markets tend to be forward-looking, so many had already priced in a cut from the Fed, despite uncertainty over how much the rate might fall by. The Guardian reports that, the day after the cut was announced, the S&P 500 climbed by 1.7%, closing at its first record high since July. The Dow Jones also hit a record high, climbing 1.3%. The Nasdaq Composite climbed by 2.5%.
This built on positive year-to-date returns for the major indices. The Guardian report shares that, between the start of 2024 and 19 September, the S&P 500 grew by 20%, the Nasdaq rose by 22%, and the Dow Jones climbed by 11%.
The stock market response to the cuts could be short-lived
Though it’s good news that stock markets are responding positively to the change, it’s important to remember that fiscal events such as the interest rate cut rarely have a lasting impact on returns.
This is partly because there are so many different factors that can affect stock market performance, such as:
- Economic events
- Investor sentiment
- Political changes or events
- Sector-specific disruption or developments.
This means it’s impossible to know for certain what returns will be like tomorrow, next week, or next month.
So, whether stock markets are under- or overperforming, it’s important to remember that making changes to your portfolio based solely on the current conditions is rarely wise. Instead, taking a long-term view of your investments and remembering that fluctuations in either direction are normal may be a more helpful way to progress towards your long-term financial goals.
Get in touch
If you’re concerned about how fiscal events could affect your wealth, please get in touch to learn more about how our team of financial planners can help.
Email enquiries@metiswealth.co.uk or call 0345 450 5670 today to find out what we can do for you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
