Powell finally gave up and said we will lower interest rates. Of course, the rote learners immediately came out and started saying that whenever the FED lowers interest rates, the American economy goes into recession, the markets crash, buy and get rid of it. Is that so or is there a more nuanced situation? In fact, do interest rate cuts often offer good things to patient people? First of all, it is useful to understand the perspective of the rote learners or most economists. They say that if the FED lowers interest rates, it is because America is in recession. When America enters recession, companies' incomes decrease. This pushes the stock markets down and when we look at the graph in a rough sketch, it seems like they were right. For example, you know the famous 2008 crisis period, it was America's great financial crisis. While the FED was lowering interest rates, the American stock market was also falling rapidly and America was also in recession. We go back a little further. Around 2001-2002, the FED lowered interest rates. America was in recession at the same time and Nasdaq was also falling rapidly. Based on these, they say that the FED's interest rate cuts are bad for the stock market. I say sometimes it's bad, sometimes it's good, but most of the time it's good.

Let's get into the details. Let's look at some interest rate cuts in recent history. For example, when the FED started to cut interest rates in 1989, the stock market went flat, it didn't fall, nothing like that happened, then the recession really started, and after the recession, the FED accelerated the interest rate cuts even more, so the stock market's rapid rise continued to grow stronger. During the period of decline, with the FED's intervention in interest rates, that decline is also quickly overcome, the stock market goes up. What happened in 2001? The FED's starting to cut interest rates didn't make the stock market fall, the stock market was already falling when the FED lowered interest rates. In other words, the American economy was already struggling. Remember, the FED responded to the great economic difficulties experienced in America by lowering interest rates in those years. After the FED started to lower interest rates, the decline in stock markets really continued for a while, then we found a bottom and started to rise again. The stock market did not go into crisis because the FED lowered interest rates. The FED lowered interest rates because the stock markets were in crisis and the signs of recession in the American economy were intensifying. One was not the cause of the other, but the result.

If you pay attention to where the FED started lowering interest rates in 2008, this is also where the American stock market made such a double peak, and then, as the FED lowered interest rates, the economy entered a recession and the stock markets fell. So yes, what the memorizers say is true here. But there are three different results in three different cases. I do not take the Covid period into account. Because the issue has nothing to do with the FED's interest rates during the Covid period. We know that since the whole world was closed, economies suddenly stopped and the FED reacted to this by quickly lowering interest rates. I have done many such studies in retrospect and I have seen that there is no such direct correlation. In fact, when you look at a little more detail, there is the fact that interest rate cuts are often very positive for the stock market after a certain period.

After the interest rate cut in 1929, stock markets fell by 33% in one year. However, in the vast majority of subsequent interest rate cuts, they were always positive. The exceptions were 1973 - 1981 - 2000 and 2007, in all others the stock market's reaction was upward. So if interest rates fall, stock markets fall, at least when we look at it in a one-year term, it is not a correct opinion at all. When we extend the terms a little more, we come across even more positive things. For example, after the interest rate cut cycle started in 1970, the stock market increased by 15% in one year, the increase reached 34% in 3 years, and 8% in 5 years. There are more extreme years. After the interest rate cut in 1979, the stock market rose by 40% in 1 year, 48% in three years, and 99% in five years. After the interest rate cut in 1980, the increase in 5 years was 132%, 86% in three years, and 41% in one year. When we look at recent interest rate cuts, after the interest rate cut in 2001, the stock market fell 12% in the first year, 14% after 3 years, and then turned positive. The interest rate cuts in 2007 are one of America's most severe economic crises. It fell 22% in 1 year, 21% in 3 years, and then rose 8%. In the most recent interest rate cuts during Covid, the stock market was up 11% at the end of 1 year, and up 46% at the end of 3 years, and we haven't even reached 5 years yet.

When we look at the average, there is a 13% increase in 1 year in all these periods. There is a 43% increase in 3 years. There is an 89% increase in 5 years. When we look at the median, the figures are 16%, 41% and 97%. There is an even more interesting point. Maybe we shouldn't be too afraid of recession. For example, there really was a recession after the 2019 discount. Despite that, the stock markets are rising. If you extend your term to 3 years in 2001 and 2007, you can only recover. In contrast, the stock market experienced incredible increases despite the recession in the 1982 discounts. Similarly, there were incredible increases in the 1981 interest rate cuts despite the recession. In other words, there is no guarantee that the stock market will fall because there is a recession. There is no guarantee that the stock market will fall when interest rates rise. On the contrary, most of the time, the stock markets go up. But of course it is useful to remember that the maturities here are around 1 year, 3 years and 5 years.

A more interesting graph regarding the relationship with recession comes from The Compound. When we look at the details, even if there is a recession in the United States stock markets after interest rate cuts, there is an average increase of 11%. If there is no interest rate cut, it is 15%. These are 12-month figures. When we go to 3 years, it is 40% to 48%, when we go to five years, it is 84% ​​to 97%. So yes, interest rate cuts may be causing trouble. But even if there is a recession afterwards, in most cases you are back in profit within 3 years at the latest. The worst examples are the ones that happened recently, after the interest rate cuts in 2001 and 2007, the return took quite a long time. But most of the time these returns are faster.

Of course, this does not mean that you will not suffer in the short term. Because when we look at 3 months, 6 months or 9 months, things change a little. For example, when I look at the average, I see that the stock market went back -0.5 in the first 3 months after the interest rate cuts. They turn positive by 2.9% in 6 months. They turn positive by 3.3% in 9 months. They come to 3.5% in 12 months. But there are also different reactions in different years and especially 2001 and 2007 were very difficult periods for investors, they suffered a lot in the short term. So in which cases does the increase occur faster after the interest rate cuts, and in which cases can the decrease be sharper. The main issue here is why the interest rate cut was made. If you make interest rate cuts in an economy that is already doing well because inflation has decreased, the stock markets tend to go up, even if they shake up a little in the short term.

On the other hand, if you make interest rate cuts because things are going bad, the stock markets continue to go down a little more. The best example of this is the interest rate cut cycle that started in 1989, but the stock markets were already going up at that time. There was a recession at that time, albeit short, but the increase continued rapidly. On the other hand, the stock markets had already started to fall in 2000, the FED's interest rate cuts were not preventing the declines, the declines were continuing a bit more. They might even be accelerating a bit. Therefore, the issue we need to look at is why America is cutting interest rates. Powell said in his last meeting that we have now won the fight against inflation, we are afraid of the employment market, our main struggle from now on will be employment. Again, some economists interpreted this as the FED seeing a recession. Whether it is or not is a somewhat debatable issue, but I think if we examine some of the data the FED looks at, our minds will be a little clearer.

As you know, in the last employment report, unemployment in the US was 4.3%, which is quite high. In the meantime, new employment data will come this week. I think this number will improve a little. Because I believe that temporary reasons such as the Texas hurricane played an important role in this increase. But let's say it remained at 4.3, it is clear that the trend is upward here. This worries the FED, and the FED is right to be worried about this. On the other hand, when I look at the employment data of the United States since 1950, I see that unemployment is currently very low, almost at rock bottom. In other words, the FED is getting a little worried about employment early. And they are doing this well. Because employment is actually a bit of delayed information. When companies' business goes down, they don't lay off employees right away. Because it is hard to gain, train and orient new employees. They try to protect and retain them as much as possible. Then they see that things are going badly and they suddenly make inferences. Because if you pay attention, layoffs have always come very suddenly. Unemployment rates can jump suddenly. The FED may be reading such a trend and in this context, it is a matter that makes me happy that they say this is our most important issue. Maybe they are afraid of a jump here. I think the opposite is true.

I think the employment market in America is changing shape. I think there are many part-time jobs. So I don't think it's right to compare the past with the present. But if the FED's biggest fear is unemployment, they are intervening quite early this time and they say that even 4.3% seems high to us. Because we don't like the trend. We will intervene. The spending situation of the American consumer is not that bad, it is somewhere in the average. There were situations like a sudden collapse and then a rise during the Covid period. But right now it is somewhere close to the general average. When I look at the savings rates, there is a decline. In other words, we see that the consumer is spending but not saving. But I still see that it is not in a terrible place. In other words, America has seen similar lows before, but there is definitely a deterioration here.

So how does it finance spending? I see that credit card debts are increasing rapidly, most likely by loading credit cards a little. Although it has started to feel a little stress recently, it will be in the first quarter of 2024, but there is definitely a deterioration here. In other words, unemployment in America is slowly rising, it may suddenly accelerate. Citizens continue to consume. But now he can't save money and he's a bit too much on his credit card. In other words, the economic slowdown in America was something the FED wanted anyway and it's happening. But there's no sign of a recession. In fact, when I look at the growth rates of the United States, as you know, as of last week, they revised the second quarter growth rate upwards, there's a 3% growth. The quarters before that were 1.4%, 3.4%, 4.9%, so I don't expect a minus in the third quarter, to be honest. I expect a decline in economic growth, but I don't expect a minus, and in fact, even if there's a recession, the probability of American markets going up is still high, as long as the FED starts lowering interest rates.

The FED started raising interest rates at the end of 2022. From there, they raised them quickly and sharply for 17 months. It was one of the harshest and fastest interest rate hike cycles in history. They've been keeping them almost constant for the last 12 months. When we look at it historically, I see that the FED has a very strong hand. Because right now, interest rates are at their peak in recent years. Interest rates are around 5.5, inflation is around 2.5%, it is possible to lower interest rates by 3 points. If the employment problem is really big, I see that the FED has a very strong hand in interest rate reduction. After the 2008 crisis, they had to quickly lower interest rates to 0.25. They lowered it to zero again after Covid, and when they lower it to zero, the economy eventually recovers. Because money becomes cheaper.

Interest actually means the price of money. As the price of money becomes cheaper, both individuals and companies want to use more money and do more things. Companies want to make investments that they have postponed. They want to invest money in research and development. They want to make new company acquisitions. There is a bit of a recovery in America right now. Consumers also want to build houses with new money, renovate their houses, buy cars, consume, etc. For this reason, the price of money is a very important determinant of economic vitality, and the FED really has a super strong hand here.

Another issue where the FED has a strong hand is its balance sheet, that is, the money it puts into the market. They have come here since 2008 by making money very abundant, they have been forced to do so constantly. Until 2008, the supply of US dollars in the market was below 1 trillion dollars, but in May 2022 it rose to 8.94 trillion dollars. It has now fallen to 7.12. In other words, they seem to have an opportunity of almost 1 trillion dollars in terms of making money abundant here, and remember, three banks went bankrupt in a row in the banking crisis of 2023. They have shown that they are now using these mechanisms very effectively and can give money to the market very quickly, and in the same way in Covid. However, in the 2008 crisis, for example, when banks in America went bankrupt, they had a very hard time putting money into the market. I am not saying this is good or bad.

I think leaving bad markets alone can yield better results in the long run. When I look at it from a narrower perspective, I see that the FED has a very rich hand in terms of money supply and I think that it also has a strong hand in terms of interest rates. When I look at it from this perspective, it is possible for the FED to both increase the money supply and seriously reduce interest rates. This will also ease the markets. On the other hand, the money is not only in the FED, there is money in citizens and companies. The amount currently parked in money funds in America is around 6.44 trillion dollars. This means money that people invest in money funds with 5%-6% interest. As the earnings of money decrease, this money will also come to the stock markets. It will go to different investment vehicles, maybe to commodities.

I expect a serious increase in commodities. Because if interest rates fall, companies will invest in production and try to increase their production. I believe that all of this will ensure that commodities will also move upward cyclically. Therefore, I do not claim that all of this money will go to stocks. But it will shift to areas other than money funds. I believe that some of this will go to stocks and hopefully some of it will go to assets like Bitcoin.

If I have to summarize, I see the next 12 months as good. But that does not mean that I see this month or the next month as good. This does not mean that the stock markets will not progress without falling. Remember, the beginning months of interest rate cut cycles can be a bit difficult. But I believe that the FED is not too late. At least I want to believe it. The data seems to support me for now and I believe that the FED has the possibility of keeping the markets up with a very harsh intervention and I believe that the American economy will experience another revival in the next 12 months in an environment where liquidity is abundant and money is cheap. Of course, I could be wrong.

For example, the manufacturing PMI is coming in America today. Remember, that was the data that triggered the decline in early August, the data that tells about the developments on the production side. Although production is not America's strongest area. America is a service economy, but they can still take the markets down a little tomorrow. It is not possible to know this, but when I look at the big picture, I believe in a stock market where money is plentiful, interest rates are falling, and the probability of stock markets and risky assets going up over the next 12 months is higher than the probability of them going down. But it is not possible to know very short-term movements.

The information, comments and recommendations contained herein are not within the scope of investment consultancy. Investment consultancy services are provided within the framework of the investment consultancy agreement to be signed between brokerage firms, portfolio management companies, banks that do not accept deposits and customers. The comments in this article are only my personal comments and these comments may not be appropriate for your financial situation and risk return. For this reason, investments should not be made based on the information and comments in my articles.