3 things we heard at the rate cut after-party

Welcome to the rate cut after-party.

Last week’s Federal Reserve meeting was the event of the year for economists, investors and market enthusiasts alike. But just like other high-flying functions, the September FOMC meeting had a bit of an after-party this week. Investors were treated to key headlines, market moves and macroeconomic releases across the globe that gave us confidence that diversified investment portfolios could continue to deliver strong performance. Here are some highlights: 

• The S&P 500 hit all-time high #39, #40, #41 and #42. It is now up +2.3% since the September Fed meeting.
• Second-quarter U.S. GDP grew at a 3.0% pace, and prior years were revised higher. In the details, the household savings rate was also revised up to 5.2% from a previously reported 3.3%. This means consumers are on much more solid footing than previously believed. The same release showed that corporate profits rose to a near record 13.2% of GDP.
• Chinese equities (CSI 300) had their best day in four years, gaining +10.4% at Thursday’s close thanks to a flurry of Chinese policy announcements (more on that below). As a result, a handful of global equities linked to China’s outlook rallied.
• Gold continued to shine, making multiple highs on the week and hovering around $2,674/oz, while copper had its best day since 2022 on Tuesday, up almost +7% through Thursday.

In this week’s Top Market Takeaways, we are giving you the skinny on three learnings beyond the Fed and what they may mean for your portfolio.

Three observations from the week 

1. The housing market may have started to find its footing. While interest rate cuts can theoretically have broad and immediate impacts, bond markets were already expecting a big shift in policy. This means that even though the Fed has officially kicked off the rate-cutting cycle, mortgage rates have been falling for five months. In fact, the Mortgage Bankers Association’s (MBA’s) 30-year fixed mortgage rate declined for the eighth straight week, marking its longest downtrend since 2019. The rate for a 30-year mortgage is about 6%. That’s more than a full percentage point lower than its most recent peak in May, and well below the 2023 peak when rates approached 8%.

The MBA’s refinancing index, while still depressed, jumped by 20% week-over-week, the largest rise since April 2022.

That’s the good news. The not so good: Sales of new homes in the United States dropped -4.7% in August, and pending home sales missed expectations.

It is only logical that homeowners who bought in recent years would take advantage of the lower rates that dropped as financial markets priced in the prospect of Fed rate cuts. That said, it will likely take much lower mortgage rates to see a big swing higher in activity.

Why? Sixty-one percent of U.S. homeowners hold a mortgage, and 64% of those mortgages are locked at rates of 4% or lower. Even if mortgage rates dropped to 4.5%, only ~20% would be in the money to either move and get a new mortgage or to refinance. 

As the Fed continues easing monetary policy, we expect more turnover in the housing market, and more homeowners to tap into their home equity through refinancing and HELOCs. However, mortgage rates will likely need to fall significantly more from current levels before we see a meaningful pickup in the housing market. But the direction of travel is clear—rates are moving lower, which should still provide a pickup in housing turnover and housing supply, though likely not as fast as during previous cutting cycles.

2. China shook up global markets with a slew of policy announcements in response to weak macro data and property pressures. The People’s Bank of China (PBOC) introduced several measures:

• Monetary easing: A 20-basis-point policy rate cut, a 50-basis-point reserve requirement ratio (RRR) cut, and a 50-basis-point interest rate cut on existing mortgages. The RRR cut may allow more bank lending, though low net interest margins (NIMs) limit cost reductions. The mortgage cut could slightly boost household finances and consumption.
• Housing support: The PBOC will now cover up to 100% of bank loans to buy unsold housing, up from 60%. Estimating the property downturn’s bottom is challenging, as prices remain relatively stable, but investment and sales are significantly down.
• Equity market boost: A swap facility for securities firms, funds and insurance companies to borrow directly to buy stocks. Government entities are likely to use these facilities to purchase onshore equities, boosting sentiment and liquidity, though their impact on economic growth and corporate earnings is uncertain.

The Politburo reinforced its support for the economy, pledging stronger fiscal and monetary measures with a focus on the housing market and consumption, and efforts to boost capital markets.

While the policies signal strong support and reduce downside risks, their impact may be limited and short-lived as they focus on broad credit supply rather than weak aggregate demand (which is the key challenge).

Key questions remain about the policies’ implementation and whether further fiscal stimulus will follow to support consumption and sustain recovery. Tactically, we see opportunities in the policy- and momentum-driven onshore equity market to catch up with the offshore market.

3. All the while, U.S. stocks continued to make #gains. Turns out that stocks like rate cuts and solid economic growth. The S&P 500 made four new all-time highs this week, and currently sports a year-to-date return of over +20%—the best year-to-date performance since 1997.

The S&P 500 has spent roughly 66% of all trading days this year within 1% of an all-time high. That is well above the historical average. Over the last seven decades, the S&P 500 has spent only 20% of the time within 1% of an all-time high (inclusive of being at an all-time high).

Counterintuitively, runs like this can create uncertainty for investors. Is there more room for stocks to run? Have you missed the rally? Should you wait for a pullback to get invested?

While we did see an -8.5% drawdown from July highs, getting the timing just right is a difficult game to play. It is often better to just get invested. For example, looking at the average two-year forward price return of the S&P 500 from 1970 to today, investors were better off investing at an all-time high than on any random day. 

While the main event usually gets the spotlight, this week reminded us that there is always something to learn, analyze and discuss beyond the biggest headlines.

Your J.P. Morgan team is here to help sift through the big and the small, to prepare your portfolio for what may be on the road ahead.