This week, we saw a further rate cut. The USA is expecting rate cuts next month. This raises the question of how investors can expect rate cuts when share markets worldwide, including Australia, are hitting all-time highs. This goes to the ‘lag’ associated with market performance and what is happening in the mainstream economy. In the US, they have terms for this – Wall Street (the Markets) versus Main Street (the People).

Firstly, rate cuts are usually associated with recessionary conditions. Interest rates are usually cut by Central Banks when they fear the general economy is turning downward, and they need to stimulate the economy.
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Professional Investors are betting that we are moving into an easing cycle where interest rates will go down further. The Federal Reserve will cut interest rates by up to two per cent over this easing cycle. By lowering rates, borrowing will become easier and cheaper, encouraging spending both at a consumer level and at a business level. The unfortunate aspect of lowering interest rates in Australia is that it automatically creates an uptick in property prices – something the Australian Government is trying to avoid.

So, while we have rates beginning to fall, we have equity markets, residential property and gold and Bitcoin at record prices. We are even seeing Credit spreads associated with Business credit and Government bonds narrowing, suggesting there are no concerns about market risk.

While it’s great to be optimistic, there is a belief, misplaced or otherwise, that markets and the underlying economies will strengthen and that rates will be cut just enough to keep growth going without triggering inflation.

This is akin to walking a fragile tightrope. Better to be cautious.

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