[DcifrThs]

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DcifrThs

Consider this exercise.

The Fed never announces a cut in a vacuum. It is normally in the context of some negative news for the economy.

Now given all the reasons you have given for why interest rate cuts lead to a positive price action in equities could you postulate how bad the negative news would have to be to counter the upside from an interest rate cut.

I ask because if one looks at the recent history the news has been fairly negative but has never got close to actually leading to a fall (by news I mean assessments from the fed) . In fact the worse the news the bigger the positive price action because the likely hood of bigger and more sustained cuts becomes a greater possibility.

The greatest absurdity is that the only announcements from the fed the markets hates to hear is that there is an inflation danger (hence inhibiting interest rate cuts).
"There is a danger of inflation this month so this month we wont be inflating."

Contradictions and absurdities infest the system of money at the moment imo.

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there are two things you need to understand that you don't EDIT: seem to (from your above post).

1)a reduction in the likelihood of rate cuts are not only caused by increased inflationary pressures but also as a result of decreased downward economic pressures. so if the fed announces that the rate cut won't happen, it maynot be just because inflationary pressures are too high. it may also be because growth expectations were too low.

2) mathematically, a rate cut means more in terms of % gain than a rate hike means in terms of % loss.

to test this, take a 30 year coupon bond and ignore principle. look at the coupon payments annually (for simplicity). imagine $100 payments for 30 years at 5% interest. at par, these payments are worth $1537.245.

with a 10% rate cut, the value of these payments goes to $1628.889, or a 5.9616% gain.

with a 10% rate hike, the value of these payments goes to $1453.37 or a 5.4559% loss.

so a rate cut SHOULD be more meaningful than a rate hike.

also, you should consider that a rate hike to the Dow means less than to the S&P500 since the S&P500 is more broad based. the Dow includes only those companies that have better access to lower ovreall costs of capital. in other words, a rate hike would have less effect proportionally speaking on the dow's cost of capital than it does the S&P due to both industry considerations and individual company considerations.

this last part is based on my own extension of my understanding of the markets though (the dow vs. s&p cost of capital) so let me know if i've mispoken here or made a logical mistake.

the first two issues though i'm fairly certain of (especially the 2nd since that is simply bond convexity extended to equities)

thanks,
Barron

EDIT: it would be an interesting study to see mathematically, what difference rate change probabilities *should* have on various selections of stocks and what those probabilities actually result in in terms of price changes of these indices.

it may certainly be the case that the market overreacts/underreacts in certain cases (you'd have to control for the reason behind rate change expectations in the fed fund futures/options markets which wouldn't be hard imo)

it seems to me though that your bias (like mine - though i've been trying to decrease it - and everybody's) really shines through in your posts.