Rate Cuts at Market Highs

'Cause she's so high
High above me
She's so lovely
--Tal Bachman

Major US equity indexes are marking all time highs after Fed chair Jerome Powell's dovish speech in front of Congress yesterday seemed to guarantee that the FOMC will cut rates at its upcoming July meeting. That the Fed plans to lower interest rates with markets at all time highs has raised more than a few eyebrows.

But such a move is not unprecedented. In the fall of 2007 the Fed cut rates three times to bring down the Fed Funds Rate a full percent from 5.25% to to 4.25%. Stock markets proceeded to rally to all time highs during this period.

The euphoria was short-lived, of course. The following year saw markets absorbing the full effects of the credit crisis. The SPX would fall more than 50% from those rate cut highs. In fact, the Fed furiously cut rates in 2008, lowering the Fed Funds all the way down to an astonishing 0.25% by December.

By that time, markets  no longer celebrated the cuts. Instead, they plummeted lower.

History suggests that caution, not euphoria, is sometimes warranted when the Fed cuts rates at all time stock market highs.