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Seasonality around rate cuts

Markets tend to be efficient and incorporate all information in the price, which allows investors to correct most seasonallties through arbitrage. However markets are not fully efficient. They show patterns that often repeat themselves if not exactly, pretty closely. In the chart below, you can see the average behavior of the S&P 500 since 1871, around the first rate cut from the Fed. It usually starts with an inverted yield curve (check), then the curve steepens (check) then financial conditions tighten, credit in particular (check) and then at some point comes the first rate cut. It can take a year from that point till the index bottoms, and that depends on economic conditions and how aggressive the Fed is cutting rates. The market now discounting 6 cuts in the first 9 months of 2024.

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Chart source: BoA research

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