It has been a decade since the federal reserve last cut interest rates. The last time rates were cut was during the great recession of 2008-2009. Now 10 years into the longest bull market, it is almost certain that they will cut rates once again considering the market has priced in a 100% chance of it happening this Wednesday, July 31st.
When markets fully price in an event before it happens, it is likely to become a "sell the news" event. This means that if the Fed delivers as expected, which is a 25 basis point cut, the market will likely sell off temporarily and then move back higher and make all new record highs.
Scenario 1. Fed delivers as expected, market sells off temporarily and eventually moves higher again.
Scenario 2. Fed cuts rates by 50 basis points rather than 25, which will spark an immediate rally and more all-time highs going forward.
Scenario 3. Fed does not cut rates at all. Market will sell off heavily and potentially crash.
We personally think scenario 1 is most likely.
It's also important to listen to the Fed's guidance on future monetary policy. Investors expect more monetary stimulus such as rate cuts and quantitative easing in the future. Therefore, even if rates are cut this week but the Fed decides it will not provide future stimulus, the market will likely sell off hard.
We do expect more stimulus to come soon though, along with new highs for the stock market and for precious metals such as gold and silver.
This week will likely be a very volatile one since this will be the most important week in a decade, in our opinion. What happens this Wednesday is going to set the tone for the rest of the year and possibly even next year. It’ll show the market how determined or undetermined the Fed is to support the market.