SPY Soars to Record, TLT Drops in Delayed Reaction to Fed

Investors may have had a delayed reaction to the Fed's huge 50 basis point rate cut.

The Fed’s 50 basis point cut was bullish after all. 

One day after closing modestly lower in the hours following the U.S. central bank’s largest interest rate cut since 2020, the SPDR S&P 500 ETF Trust (SPY) soared to record highs.

On Thursday, SPY was trading up by as much as 1.9%, putting it more than 1% above its previous all-time closing high from July.

The Invesco QQQ Trust (QQQ) recently surged more than 3%, putting it around 3.5% below its all-time high.

Thursday’s rally seemed to be a delayed reaction to the Fed’s hefty rate cut, with investors increasingly coming around to the view that the U.S. central bank’s action makes it more likely that the economy can slow without falling into a recession. 

The Fed also signaled that more rate reductions were likely ahead. The Fed’s “dot plot”—Fed officials’ best guess as to where rates will be in the future— indicates that the federal funds rate could fall below 3.5% by the end of next year—a full 200 basis points below where they were at the start of this week. 

More Rate Cuts?

For stock investors, it is the best of both worlds: a big rate reduction now with hints of more to come.

For bonds, the Fed decision is more of a mixed bag. While the Fed lowering rates is supportive of the asset class, bond yields had already fallen significantly ahead of this week’s rate cut.

The 2-year and 10-year Treasury yields fell to 3.6% on Tuesday, well below the current federal funds rate range of 4.75% to 5% and in-line with where the dot plot suggests the fed funds rate could be at the end of 2025.

In fact, on Thursday, bond yields ticked up slightly as some investors took profits on their gains (bond prices and yields move inversely).

Some investors may also be speculating that by moving aggressively to lower the federal funds rate, economic growth and inflation may be higher than they otherwise would be—which could put upward pressure on long-term interest rates.

The iShares 20+ Year Treasury Bond ETF (TLT) was recently trading with a loss of about 0.7% as the 30-year Treasury bond yield ticked up 5 basis points to 4.07%.