Markets are currently busy preparing for the upcoming cutting cycle from the Fed, expected to start in September. The simple playbook is often used when markets face a “high probability event,” and markets are now acting as if they know what’s ahead. A Fed cutting cycle is triggered by a recession; therefore, buy bonds, sell risk assets, and buy gold, etc. We all know the drill.

However, there are reasons to be skeptical about the current view on the ramifications of a Fed interest rate cut. First, historical evidence from previous rate-cutting cycles shows that returns across most assets have a roughly 50/50 distribution. Second, usual rate correlations have broken down completely after the pandemic, as seen in chart 1 below. So it’s probably not wise to think that this cutting cycle will just behave as usual without doing more analysis than that.

Hence, it’s not a question of IF the Fed cuts, but rather a question of WHY they cut if you want to understand the markets throughout the remainder of the year. The question of WHY the Fed cuts and which kind of cycle we are currently in will be addressed in a more detailed piece soon.