Economic Data and Market Highlights
On Wednesday, the rate cutting cycle finally began, with the Fed lowering rates by 50 bps to a policy rate of 4.75%-5.00%. Global equity markets rose for the week as the MSCI All Country World Index advanced 1.29%.
The S&P advanced 1.67%.
Following the announcement, stocks rallied, reaching intraday highs due the enthusiasm around growthier stocks benefiting from a lower rate environment. The S&P 500 reached an all-time high of 5730.26 the following day. Friday’s trading was more muted as some steam was let out of the market. Since Wednesday’s announcement, CME Groups fed watch tool is showing a 52.5% probability of a 50bps cut, and 47.6% probability of a 25bps cut at the feds next meeting in November. If these rate cuts continue on trend, it should be expected that equities will have a strong performance over the next year. According to JPMorgan, since 1980, five of the best ten years for the S&P 500 took place during rate cutting cycles. Furthermore, the fed has cut rates when the S&P 500 is withing 1% of its all-time high 12 times, with the rising 15% on average in the year following.
Small banks have outshined larger banks following the fed’s announcement Wednesday to lower rates by 50 basis points. The KBW Nasdaq Regional bank Index has outperformed the KBW Nasdaq Bank index for the first few days following the news. The KBW Nasdaq Regional Bank index tracks 50 banks with market cap below $10 billion while the KBW Nasdaq Bank Index tracks larger names like JP Morgan Chase and Goldman Sachs as well as the largest regional banks that are almost at a national scope like U.S. Bancorp and PNC Financial. It isn’t a huge outperformance, but it has extended the regional banks run since the midpoint of the year when expectations around rate cuts began to tick upward. Since then, regionals are up roughly 18% while big banks are up about 10% with both outperforming the S&P 500 Index. What is sparking the run is last year’s collapse of Silicon Valley Bank in the spring of 2023 weight down the space as well as more interest rate sensitive liabilities and less rate sensitive assets. On the lability side, smaller banks have been able to rely on the amount of core deposits which are a key feature in larger banks. They in turn moved to funding like certificates of deposits, brokered deposits and short-term loans which are priced closer to higher market interest rates. As interest rates fall those sources of funding will become cheaper while big banks aren’t as affected because the core deposit costs won’t fall as much. Smaller banks also tend to be more exposed to mortgage banking for both residential and commercial. Commercial loans for office spaces and properties will find it easier to refinance at lower rates which takes some credit risk out of the picture.
Lower mortgage rates for homes should also see re-financing and purchasing. Smaller banks are also much less exposed to credit card lending which is floating rate that will be coming down. Per FactSet, S&P 500 banks, or larger banks, are anticipated to see 6% earnings-per-share growth from 2024-2025. On the other hand, smaller banks in the S&P Mid Cap 400 Index are expected to see 17% earnings growth. Once rates settle into a new normal state big banks should regain stronger earnings and growth.
On Friday, Constellation Energy announced that the company would reopen Three Mile Island in order to generate power for Microsoft’s data center initiative. In 1979, Three Mile Island was the scene of US’s largest nuclear accident. The current deal will last 20 years and the reactor that will provide power to Microsoft was not involved in the 1979 accident.
The Past Week’s notable US data points
The Upcoming Week’s notable US data points
Data Source: Blackrock, Bloomberg, Charles Schwab, CNBC, Goldman Sachs, J.P. Morgan, Morningstar, MarketWatch, Standard & Poor’s, and the Wall Street Journal.
Authors:
Jon Chesshire, Managing Director, Head of Research
Michael McNamara, Analyst
Sam Morris, Analyst