You want the Fed to cut rates? Be careful what you wish for because it could just be the thing that sends your superannuation portfolio into freefall. Why would a rate cut cause a super sell-off? Aren’t rate cuts good for the stock market? I know what I am saying sounds quite daring, but here are the facts that no one is talking about.
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Goldman Sachs just shifted its forecast, saying the U.S. Federal Reserve will likely start cutting rates by 25 basis points in September. Sounds great, right? Wrong.
Because if you think a rate cut means a booming market, think again. In an easing rate environment (where rates are falling consistently), markets generally fall early in the cycle and start reversing up just before easing ends.
In fact, since 1999, the beginning of the rate cut cycle from the 5% level has never been the rally point; it’s been the warning shot.
In January 2001, the Fed began easing rates after hiking them from 1999 to May 2000, when rates rallied to 5.25%. Following the first cut in 2001, the S&P 500 fell 49%.
From 2004 to 2006, the Fed pushed rates above 5% before they began easing rates in September 2007. The first cut came just one month before the market peaked, and what followed was one of the worst crashes in history, with the S&P 500 plunging 57% during the GFC.
From 2015 to 2018, the Fed hiked rates again to 2.5% before they started to reduce them in July 2019. And what happened next? COVID-19 and a 34% crash for the S&P.
After lifting rates from March 2022 to above 5%, the Fed switched to cutting rates in September 2024. What followed was a sharp 16% drop on the S&P 500 Index by March 2025, before the market managed to rebound.
But history doesn’t lie. Once the cutting phase begins, further rate cuts often lead to a much deeper downturn. And if history repeats, it won’t be a small one.
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Most Australians don’t realise that a huge chunk of their super is invested in U.S. equities, especially via international and high-growth fund options. So, if the S&P 500 falls 50%, your retirement will take a massive hit, which begs the question: How do you avoid a superannuation disaster?
Here are my top three tips for that scenario:
- Watch the price, not headlines. Forget what they say and focus on what the market does.
- Protect capital first and chase profits second because once your portfolio drops 50%, you need a 100% return to break even.
- Limit market risk. The more stocks you own, the more risk you’re exposed to if the whole market declines.
So, before you pop the champagne on a rate cut, ask yourself: Is this really the start of a bull run, or the beginning of the next major market decline?
For now, good luck and good trading.
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Disclaimer: While Wealth Within holds an Australian Financial Services License (AFSL:226347), the information featured in this program is general in nature and therefore should not be relied upon. Before making any investment decisions, you should consult a licensed professional who can advise whether your investment decisions are appropriate for you.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in bookstores and online at www.wealthwithin.com.au.
The material provided in this article is for information only and should not be treated as investment advice. Viewers are encouraged to conduct their own research and consult with a certified financial advisor before making any investment decisions. For full disclaimer information, please click here.