Rate Cut Focus Is Proving Overrated … in Charts!

A lot has changed in 2024, but one thing remains: Investors remain irrationally and unnecessarily obsessed with central banks. Headlines are at it again this week, first cheering that the benign inflation report could tee up another supposedly bullish Fed rate cut next week, then bemoaning that the ECB’s cut on Thursday—its fourth this year—is too little, too late. To us, this all smacks of recency bias. Rate cuts aren’t inherently bullish … or inherently feckless, in the eurozone’s case. Rather, we think they are well known and priced in, little dots that don’t interrupt the longer trends.

Exhibits 1 – 3 show you this with S&P 500, MSCI UK Investible Market Index (IMI) and MSCI Economic and Monetary Union (EMU—aka the eurozone) Index returns year to date. In the US, stocks were enjoying a rollicking bull market run before the Fed’s first cut in September … which has continued since. The trend just extended after the cuts. Ditto for the UK, where initial post-election optimism in the summer gave way to Budget uncertainty in the autumn. And in the eurozone, where political uncertainty in France and Germany contributed to choppy returns since May and an autumn correction (sharp, sentiment-fueled drop of -10% to -20%). At no time this year did rate cuts coincide with a change in stocks’ broader direction.

Exhibit 1: Rate Cuts and the S&P 500

Source: FactSet, as of 12/12/2024. S&P 500 total return in USD, 12/31/2023 – 12/11/2024.

Exhibit 2: Rate Cuts and UK Stocks

Source: FactSet, as of 12/12/2024. MSCI UK IMI return with net dividends in USD, 12/31/2023 – 12/11/2024.

Exhibit 3: Rate Cuts and Eurozone Stocks

Source: FactSet, as of 12/12/2024. MSCI EMU Index return with net dividends in USD, 12/31/2023 – 12/11/2024.

Something else you probably noticed: Non-US stocks haven’t shone as brightly as US stocks. UK and eurozone stocks are both flattish in US dollars and local currencies, and recently, volatility has struck. Given headlines hype headwinds across the pond and are getting warmer toward US stocks, it wouldn’t surprise us if the temptation to ditch a global portfolio and go all in on the U-S-of-A was bubbling.

But trading on past performance and widely known fears is always an error, in our view—true whether we are talking about short-term declines, rallies or leadership trends. The issues weighing on UK and eurozone stocks are well-known: economic jitters, political uncertainty and tax hike dread in the UK and France. The negativity you see in Exhibits 2 and 3 is likely, to a very large extent, stocks pricing these fears. Timing a resurgence precisely is impossible, as sentiment is fickle. But experience tells us sentiment-driven volatility rarely lasts long, and in our view, it isn’t a reason to avoid the rest of the world. Recent volatility doesn’t change the fact a global portfolio is more diversified, with more opportunities to capture return and mitigate risk.

When strong returns in a given category prompt investors to get greedy and chase heat, we will generally counsel that you can’t buy past returns and that past returns don’t predict. Well, when recent volatility tempts you to sell, remember you can’t sell past returns—and they, too, don’t predict more downside ahead. It can be difficult, we know, but it is important to look forward without letting returns that just happened skew your view. And, of course, without overrating central banks’ moves.