By: Dividend Sensei
A big reason for December’s big market crash (the S&P 500 plunged 17% in three weeks and the Nasdaq fell into a bear market) was fear that the Fed might blindly hike rates three times in 2019 despite rising recession risks. A 180-degree dovish pivot by the Fed helped drive the strongest Q1 rally in 32 years.
Then in May trade war escalation helped cause a nearly 7% market decline (the worst May for stocks in 10 years and the second worst since the 1960s). The Fed again saved the day when Chairman Powell told reporters at a conference that the FOMC would cut rates as many times as it took to prevent a trade war recession and buy a lot of long bonds as they did during the last crisis.
Given how often the Fed seems to change policy based on the stock market’s volatile swings, it’s easy to understand why the “Fed Put” is a common belief among investors.
However, even though many analysts also believe that the Fed could continue saving the day on Wall Street, history shows us that betting your nest egg on rate cuts averting a strong market decline could be a risky move.