In September 2007, the Federal Reserve made a big move: a 50 basis point interest rate cut.
After holding rates at 5% for a year, they acted in response to growing economic weakness.
After the rate cut, investor optimism rose and the market made a new all-time high.
Fast forward to today, and we’re seeing a similar setup:
- The Fed just cut rates by 50 basis points in September 2024
- This ends a year-long pause at a 5% interest rate – the highest since 2007
- Market has now made a new all-time high
In 2007, Fed officials were quick to reassure the public:
- Dallas Fed said the economy was on track for a soft landing
- Alan Greenspan (former Fed Chairman) said the US was not heading for a recession
Sound familiar?
Today, we’re hearing similar tunes:
Jerome Powell, Fed Chair, is seeing no recession risk today.
But here’s the kicker: In 2007, this optimism was short-lived.
The US entered a severe recession a couple of months after the first rate cut.
- Unemployment rose to 10%
- The financial system nearly collapsed
Are We in 2007 All Over Again?
2 major similarities stand out:
Rising Unemployment
- Both in 2024 and 2007, unemployment was rising
- Historically, rising unemployment often signals larger economic downturns
Leading Economic Indicators Flashing Red
- The Index of Leading Economic Indicators (LEIs) is warning of trouble ahead
- This index includes building permits, consumer expectations, yield curve, and predicts future economic growth
- Currently, most components are pointing down – a classic recessionary signal
The Business Cycle: Where Are We?
According to leading indicators, we’re in the peaking process before a recession.
But here’s the catch: We’ve been in this phase for 24 months.
Now we did have something similar in 2007
The peaking process began in early 2006, but the recession didn’t hit until January 2008.
Key takeaway: These indicators are great for identifying where we are in the cycle, but not for precise timing.
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Key Differences from 2007
While the similarities are striking, there are crucial differences between 2007 and 2024:
Oil Prices
- 2007: Oil prices were skyrocketing to new highs, accelerating the economic downturn
- Today: Oil prices are steadily declining, hitting new yearly lows
This means global energy demand is going down, which indicates the global economy isn’t exactly thriving right now.
However, this also means that there isn’t a big supply shortage of oil that’s pushing prices higher, which throughout history has been one of the primary causes for recessions.
Internal Market Strength (Advance Decline Line)
This indicator shows how many stocks are moving up or down within the NYSE.
In September 2007, fewer stocks moved higher despite S&P 500’s breakout.
However, today a large number of stocks are participating in the rally.
This internal market strength builds a solid case for why the current breakout to new all-time highs might hold, despite similarities to 2007.
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Read more: 3 More Months Until It Begins…
