Fed Rate Cuts: Why Do They Capture the Attention of Global Investors?

Imagine the Federal Reserve (the central bank of the United States) as the 'main water valve' of the global financial system. It determines the amount of 'water' (i.e., capital) and its price (i.e., interest rates) in the market. When the Fed chooses to 'cut interest rates,' it's like loosening this valve, allowing more and cheaper capital to flow into the market.

This action is so crucial because it directly affects the borrowing costs for everyone, from large corporations to ordinary individuals. Bank loan interest rates decrease, businesses become more willing to borrow for expansion, and people's consumption and investment may become more active. This series of chain reactions ultimately impacts the various assets we focus on, such as US stocks, gold, and even Bitcoin.

A Historical Review: The Performance of US Stocks, Gold, and Bitcoin During Rate Cut Cycles

Looking back at history, the Fed's rate cuts haven't always produced the same results. This largely depends on the 'reason' for the cut. We can broadly categorize rate cuts into two types: 'preemptive cuts' and 'recessionary cuts'.

• Preemptive Cuts: When the economy is relatively healthy but facing some potential risks, the Fed will implement small, early rate cuts as a preventative measure. During the 2019 rate cut cycle, despite the Fed cutting rates three consecutive times, the price of Bitcoin actually fell after the news, dropping from around $12,000 in July to about $7,000 by the end of the year. In contrast, the US stock market performed well during the same period. This suggests that when economic fundamentals are solid, the capital released by rate cuts may be more inclined to flow into traditional markets.

• Recessionary/Panic Cuts: When the economy is already showing signs of crisis (like the 2007 subprime mortgage crisis) or facing a sudden shock (like the 2020 COVID-19 pandemic), the Fed will implement large, rapid rate cuts. Notably, in 2020, accompanied by rate cuts to zero and large-scale quantitative easing, Bitcoin began a stunning rally, climbing from around $3,800. At the same time, US stocks also experienced a sharp V-shaped recovery.

Historical data shows that the S&P 500 index has recorded positive returns in most cases within 12 to 24 months after the Fed's first rate cut. As a traditional safe-haven asset, gold typically performs strongly during recessionary cuts when economic uncertainty increases.

A Logical Breakdown: How Do Rate Cuts Affect the Value of These Three Asset Classes?

You might wonder how the same action—a rate cut—can affect three completely different assets. Let's break it down with simple logic:

• US Stocks: For publicly listed companies, a rate cut means two good things. First, the cost of borrowing decreases, making companies more willing to invest in new projects and expand production, which can lead to higher profits. Second, with more money in the market, investors are more willing to put their capital into the stock market seeking higher returns, potentially driving up stock prices.

• Gold: Gold itself does not generate interest, like a 'hen that doesn't lay eggs.' When bank interest rates are high, the opportunity cost of holding gold is significant (because saving money earns interest). Once rates are cut, the appeal of bank deposits diminishes, and the relative cost of holding a non-yielding asset like gold decreases. Furthermore, if the rate cut is a response to an economic crisis, investor risk aversion will increase, also driving capital towards gold.

• Bitcoin: The logic for Bitcoin is more multifaceted. On one hand, it is seen as a high-risk 'risk-on' asset. When rate cuts lead to abundant market liquidity, capital seeking high returns may flow into this emerging sector. On the other hand, due to its fixed total supply and decentralized nature, some also view it as 'digital gold,' believing it has the potential to hedge against currency debasement. However, historical data also shows that the relationship between rate cuts and Bitcoin's price is not always direct or stable.

Potential and Risks: Who Has the Upper Hand in This Rate Cut Cycle?

When we discuss 'Who will win when the Fed starts cutting rates: Bitcoin, gold, or US stocks?', the answer is not black and white but depends on the specific economic scenario.

• If the economy achieves a 'soft landing': This means economic growth slows down but does not fall into a recession. In this case, 'preemptive cuts' would likely be more beneficial for US stocks. Corporate earnings would improve, market risk appetite would increase, and the stock market could be the primary beneficiary.

• If the economy heads for a 'hard landing': This means that even rate cuts cannot prevent the economy from sliding into a recession. In this scenario, investor panic would dominate. Under these circumstances, gold, with its safe-haven properties, would likely be more favored.

• Bitcoin's X-Factor: Bitcoin has a dual narrative as both a risk asset and a store of value, making its performance highly variable. In an environment of abundant liquidity, it has the potential for outsized returns, but its inherent high volatility is a risk that must be acknowledged. Ultimately, whether capital flows to it in pursuit of risk or away from it to avoid risk will depend on the prevailing market sentiment.

Investor's Guide: How to Position Your Personal Assets in an Era of Rate Cuts

Faced with a complex macroeconomic environment, rather than trying to guess the single 'winner,' it's better to return to the fundamental principle of building a portfolio that matches your personal situation.

First, the core principle is to 'understand what you invest in.' It is crucial to take the time to learn the characteristics of different assets. Understanding the corporate value behind US stocks, the safe-haven logic of gold, and the technological innovation represented by Bitcoin is essential homework before making any decisions.

Second, the concepts of asset allocation and diversification are particularly important in this uncertain environment. Spreading your capital across different types and risk levels of assets helps to smooth out the impact of volatility in any single market.

Finally, regardless of which asset class you are interested in, choosing a well-known and regulated platform for learning and experience is an important first step to ensure safety and begin your journey of understanding.

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