Also, it would be worth understanding the Rate cuts as mentioned below ..
Dow Jones vs Federal Reserve Rate Cuts Before the 2008 Crisis
Many market participants assume that interest rate cuts act as a safety net for equities. The events leading up to the 2008 financial crisis tell a far more sobering story.
September 18, 2007 – First Cut Brings a Short-Lived Rally The Federal Reserve reduced the federal funds rate by 50 basis points. The Dow Jones Industrial Average surged roughly eight percent over the next four weeks. In hindsight, this rally represented the final bull trap, as underlying credit market stress continued to deepen out of sight.
October 31, 2007 – Marginal New High With Weak Momentum The Fed lowered rates by another 25 basis points. The Dow managed to notch a marginal new high, but momentum was already fading. Market activity displayed signs of distribution, signalling that the advance was losing conviction.
December 11, 2007 – Cuts Lose Their Stimulative Effect Another 25 basis point cut failed to deliver sustained support. Within weeks, the Dow fell approximately eight percent. This was the first clear indication that monetary easing was no longer acting as a stimulus and that broader forces were dominating market direction.
January 22, 2008 – Emergency Cut Sparks Panic In an unscheduled move, the Fed cut rates by 75 basis points. The Dow fell about five percent the same day. Emergency action served less as reassurance and more as confirmation that policymakers were reacting to a deepening crisis. The market interpreted this as a sign of eroding confidence.
January 30, 2008 – Brief Bounce Then Renewed Decline A further reduction of 50 basis points produced a short-lived rebound. The underlying trend, however, had already turned bearish. Selling pressure soon resumed.
Final Outcome The Dow Jones peaked in October 2007 and went on to fall roughly fifty-four percent by March 2009. Rather than halting the decline, the sequence of rate cuts confirmed that the financial system was under severe strain.
What we can learn from this ? Accelerating rate cuts often coincide with rising risk rather than diminishing it. In times of systemic stress, monetary easing alone may be insufficient to halt the downward momentum.
Also, it would be worth understanding the Rate cuts as mentioned below ..
Dow Jones vs Federal Reserve Rate Cuts Before the 2008 Crisis
Many market participants assume that interest rate cuts act as a safety net for equities. The events leading up to the 2008 financial crisis tell a far more sobering story.
September 18, 2007 – First Cut Brings a Short-Lived Rally
The Federal Reserve reduced the federal funds rate by 50 basis points. The Dow Jones Industrial Average surged roughly eight percent over the next four weeks. In hindsight, this rally represented the final bull trap, as underlying credit market stress continued to deepen out of sight.
October 31, 2007 – Marginal New High With Weak Momentum
The Fed lowered rates by another 25 basis points. The Dow managed to notch a marginal new high, but momentum was already fading. Market activity displayed signs of distribution, signalling that the advance was losing conviction.
December 11, 2007 – Cuts Lose Their Stimulative Effect
Another 25 basis point cut failed to deliver sustained support. Within weeks, the Dow fell approximately eight percent. This was the first clear indication that monetary easing was no longer acting as a stimulus and that broader forces were dominating market direction.
January 22, 2008 – Emergency Cut Sparks Panic
In an unscheduled move, the Fed cut rates by 75 basis points. The Dow fell about five percent the same day. Emergency action served less as reassurance and more as confirmation that policymakers were reacting to a deepening crisis. The market interpreted this as a sign of eroding confidence.
January 30, 2008 – Brief Bounce Then Renewed Decline
A further reduction of 50 basis points produced a short-lived rebound. The underlying trend, however, had already turned bearish. Selling pressure soon resumed.
Final Outcome
The Dow Jones peaked in October 2007 and went on to fall roughly fifty-four percent by March 2009. Rather than halting the decline, the sequence of rate cuts confirmed that the financial system was under severe strain.
What we can learn from this ?
Accelerating rate cuts often coincide with rising risk rather than diminishing it. In times of systemic stress, monetary easing alone may be insufficient to halt the downward momentum.