With all the talk leading up to last week’s rate cut, it became a forgone conclusion that interest rates would fall. People forget, however, that the Federal Reserve only has control over the short end of the yield curve, and as one moves further out on the curve, the Fed’s control diminishes.  At the long end of the curve, rates haven’t declined; they’ve actually seen relatively large increases.  The chart below shows how much 10-year yields moved in the days after the first cut of prior Fed easing cycles. In each of the bars below, we show the change in the 10-year yield from the close on the day before the first cut to where it closed seven trading days later (in the case of the current period that would equate to the period from the close on 9/17 through 9/26).

While longer-term interest rates tended to decline in the days that followed prior cuts to kick off easing cycles, the current period is one of just three when 10-year yields increased. The only other periods where yields also increased were following the cuts to kick off the 2001 and 2007 easing cycles.

To compare the change in yields in the current period to the 2001 and 2007 periods, the charts below show the 10-year yield in the six months before and after the first cut in each of the two prior cycles versus the 10-year yield over the last six months.  For both periods, there are some similarities between the patterns leading up to the first cut. In each one, yields fell sharply in anticipation of the first cut (or the looming recession) and bounced when the Fed cut as investors became confident in the Fed’s ability to stave off a recession. In both cases, the bounce was short-lived, and yields quickly resumed their downward trajectory.

Given the similarities between the direction of yields, we were also curious to see if the path of the S&P 500 now had any similarities to the 2001 and 2007 periods. Starting with the period surrounding the 2001 cut, the patterns are nearly complete opposites. Whereas the S&P 500 was already plummeting after the dot-com peak in 2001, it’s at record highs now. The S&P 500’s performance in 2007 looks a bit more similar. In both cases, the S&P 500 experienced a moderate pullback in the weeks leading up to the cut and started recovering in advance of it. While the S&P 500 has already hit a new high since the Fed cut rates last week, in 2007 it took about three weeks for the index to get back to its prior highs. The new high didn’t last long, though, and within six months, the S&P 500 was near bear market territory with a decline of over 18%.

While the price charts of the S&P 500 now versus the period leading up to and after the 2007 rate cut look similar, breadth was notably weaker back then.  As shown in the chart below, in 2007 (top chart), the S&P 500’s cumulative A/D line peaked in the spring, and as the S&P 500 made a new high in the summer, breadth made a lower high.  Then again, October’s higher high was accompanied by a lower high in the cumulative A/D line.

For the current period, the S&P 500’s cumulative A/D line looks different than it did back then.  This time, breadth has led prices to new highs, indicating a healthier underlying trend.  Whether that positive breadth trend continues remains to be seen, but for now even as the S&P 500’s performance in the last several weeks has been similar to its performance around the 2007 cut, there are some notable differences.

Yesterday, Duke University in partnership with the Atlanta and Richmond Federal Reserve Banks published their CFO Survey results for the third quarter.  We discussed the bulk of the findings of the survey in last night’s Closer, including the chart below showing what CFOs reported to be their most pressing concerns. As shown, monetary policy continues to be the most common concern among CFOs albeit that share was the lowest in a year as rate cuts have begun.  Sales/Demand was the next most common response having picked up from only 8% the previous quarter to 9.6% in Q3.  Meanwhile, labor quality/availability as a concern has fallen steadily down to the lowest level in at least a year at 9.5%. Conversely, the share of respondents saying health of the economy is the most pressing concern more than doubled to 8.7% of responses.

There are not always the same reasons reported quarter to quarter, and Q3 featured a new and timely reason: Political Climate/Election.  Any political tensions in the US aside, this reason did rank low, accounting for only 3.8% of responses which is roughly equal with the share reporting non-labor costs and regulation as the biggest problems.

In addition to adding politics to the most pressing concern question, the survey featured a couple of election-specific special questions.  In response to the question “Has uncertainty related to the upcoming U.S. Presidential and Congressional elections led your firm to do any of the following to your investment plans?”, roughly two-thirds of firms reported that there has been no change. In other words, a vast majority of firms are pressing ahead with investment plans regardless of the election outcome. As we discussed in our Investing and Politics slides (which is worth checking out given the upcoming election), most of the time, politics is less impactful on business than we may initially think.

With that said, we would be remiss to not mention there are another 36.7% that reported they would either cancel, postpone, delay, or scale down investment plans on account of the election (note: respondents could select more than one option; percentages do not sum to 100). The survey additionally asked what CFO’s most important policy topic is for the election. Predictably, regulatory policy ranked as the highest followed by monetary policy. Fiscal policy and taxes were the next two issues to also account for more than half of responses.

Checking in on the election, today marks 40 days until Americans take to the polls.  Using data from ElectionBettingOdds.com which shows aggregate betting market odds for the outcome of the election, Harris is narrowly favored with a 51.5% chance to Trump’s 47.5% chance.  Whereas over the summer the election was looking like it could be a landslide for Trump with his odds closing in on a 70% chance of winning, since Biden dropped out with Harris as the replacement, Democrats have seen their odds improve considerably.  Over the past couple of months, there has been a decent amount of back and forth in betting markets’ favoritism and in the past several days those odds are again narrowing.  As shown in the second chart below, the odds at 40 days until the election are now the narrowest yet for the comparable point in time versus the 2016 and 2020 elections.  While the race is close currently, we would note that on the day before Election Day in 2016 and 2020, the odds widened out massively with Democrats heavily favored each time. Ultimately, those odds proved right once (2020) and wrong once (2016).  That means while betting markets can be a gauge on what will happen in November, the findings are far from a sure thing.