US Fed rate cut helps Sensex more than Dow Jones

Mumbai: The 75 basis points cut is cut and gone now and the most important question which people are asking on the street is that what will happen to the markets and how Dow Jones will react going forward.

If one just reads some of the reports, which are coming out, the view is clearly divided. Merrill Lynch is saying that it could be a good strategy to go at 16,000, buy credit, which is giving points of 13,000. There are other reports, which are suggesting that it’s time to buy.

But if one just go by the performance of how Dow Jones have reacted when all these major events were in the economy.

Go back in 2001, the last unscheduled cut happened after the September 11 event. One will find that Dow Jones, after one month had increased by around 3.5 per cent.

If one goes after three months, they will see that the Dow Jones was up nearly 11 per cent. Six months later it was up nearly 18.5 per cent.

However, if one sees, after one year of the cut, Dow Jones was in the negative territory and had given a negative return of around 8 per cent.

But the most important thing is that if one just compare the returns of Dow Jones with Sensex.

Sensex on the relative basis has completely outperformed Dow Jones. One month later after the cut, which happened in 2001, Sensex had gained around 13.5 per cent, on a two-month basis, it had gained around 2.5 per cent.

Three months later, Sensex went up around 21 per cent. But the most important thing is that after six months, it was out performing and it had gained around 35 per cent.

This is a complete out performance, if one just compares the returns of Dow Jones and Sensex.

If one compares the returns when it was the biggest rate cut in 1984, one will see that there was not much to take away for Dow Jones.

One month later after the cut Dow was up nearly two per cent. On a 1-2 month basis, there was not much change, but in six months, the Dow was up nearly six per cent, and on a 12 months period Dow was up nearly 12 per cent.

So for the period of 1-2-3 months, there was no major change, but on a 6-12 months basis they did really good.

1990 is a period which is known in history for interest rates easing. During that period starting from of 1990-1992, when Fed actually cut rates at around 525 basis points, if one compares the change in Dow Jones from a period of three years, Dow was up only 10 per cent after cutting 525 basis points.

So if one just sees all the data which is either from 1990’s or if one goes back to 1984 or 2001, there is no one scenario which one can point at that after a rate cut, Dow has to react this way.

But one important thing is that, we have seen US markets reacting more towards market sentiments then towards economic news, which is coming in.

One thing is for sure that the Asian markets, especially Sensex, has out performed because of its high beta nature. But surely Asian markets have given good returns compared to Dow Jones.