25 Or 50 Bps Cut! What’s It Gonna Be?

With uncertainty around today’s FOMC decision (50 or 25bps) at record highs, Goldman Sachs options guru John Marshall recommends buying options to position for FOMC-day volatility.

The opportunity, he notes, is most attractive in ETFs and Single Stock options.

Options imply a +/-1.1% move in S&P 500 for the 18-Sept FOMC meeting; this compares to an average of +/-1.2% move priced into SPX ahead of FOMC meetings since the beginning of 2022.

Arguably, this is an unusually important FOMC meeting due to the expected start of a cutting cycle.

On average, the S&P 500 has moved +/-1.3% during FOMC events since the beginning of 2022, coming above options implied moves.

In the July FOMC meeting the index moved +/-1.6% vs. an options implied expectations for a +/-1.1% move.

Goldman’s economists expect the September FOMC meeting to be the start of the Fed easing cycle with a 25bp rate cut followed by two consecutive 25bp rate cuts in November and December, and an eventual terminal rate of 3.25-3.5%.

They see differing asset performances around the start of the easing cycle depending on what motivated the Fed cuts.

Goldman analyzed moves across stocks and ETFs during the first Fed rate cut in the prior 3 Fed easing cycles (18-Sep-2007, 31-Jul-2019 & 3-Mar-2020).

Rate cuts during the 2007 and 2020 easing cycles were associated with a recession while the 2019 cut was due to a growth scare.

In the tables below are the top 20 names that saw unusual moves during the prior 3 Fed easing cycles and for the 2019 cycle separately.

Financials and Tech were major movers during the beginning of the prior 3 Fed easing cycles while the 2019 cycle also saw unusual moves in Consumer Staples.

Fed Chair Jerome Powell.