Dear Reader,
I’m back!
And lot has happened since I was last with you…
In today’s new video I dive right in:
Dems got a new presidential candidate. Wow.
CrowdStrike basically caused an outage that stopped airline traffic while I was on vacation, which made me have to spend 24 hours getting back from Greece to America.
Israel killed a Hamas political leader and a Hezbollah leader. That’s like tinder being lit.
Stay tuned because I’ll be talking about these things in the coming days.
But one thing that hasn’t changed is all the talk about Fed rate cuts.
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Yesterday, the Fed released minutes and there’s been a lot of talk about interest rate cuts.
So I wanted to spend a few minutes here talking to you about what happens to the stock market when the Fed cuts rates.
It’s likely not what you think…
If you look at the CME Group’s FedWatch tool, they’ve been saying 93.3% of market professionals and participants are expecting a quarter point rate cut in September and think that’s great.
Investors get very excited about rate cuts, but what actually happens to the stock market when the Fed cuts rates?
Most people think the markets automatically go higher. But that’s actually not true.
If you look at data going back to 1994 when they started tracking it in a reliable way…
What you find is the S&P 500 is actually a below average performer in the three months and the year after the Fed starts a rate cutting cycle.
And even more interestingly, it typically falls .7% in the week after the Fed begins to cut rates.
So, why does that happen?
Why does the market tend to go down when the Fed starts a new interest rate cutting cycle if lower interest rates are good for the economy?
Well, lower interest rates are good for the economy, but this stock market we’re in actually gives us a big clue…
The big clue is this:
All market participants expect a Fed rate cut in September, so that’s been priced into the market already.
I mean, this market has just marched right up and is trading as if there is definitely going to be a Fed rate cut in September.
Now, if you want my opinion, I actually don’t think there should be a Fed rate cut at all.
I believe the Fed should leave interest rates where they are.
Here’s why:
First, right now most Americans can’t afford house prices where they are.
So housing prices are starting to come down.
But if you cut interest rates that will stimulate housing and you’ll see prices start to rise again.
I have no idea why the Fed would do that!
Second, there are so many retirees out there right now sitting on money earning 5% or so in interest.
If the Fed cuts rates what that will do is penalize saving.
It would push people who save or who have an incentive to save to instead spend money…
And it pushes investors to take grosser and grosser risks.
An example of that is certain AI plays, crypto…
Low interest gets them chasing returns wherever they expect to find them.
Third, I actually think we have a pretty good economy:
We’ve got 4.1% unemployment…
Housing prices are just starting to come down…
Retirees can put their money in a Federal money market account and get around 5%…
I mean, to me, this is a Goldilocks economy right now.
This is actually a sweet-spot economy.
It looks this good and they’re still not even at their inflation target they keep talking about.
So, again, I’m in the camp that the Fed should not cut rates.
Unemployment is great. People are earning. Savers aren’t being punished…
Retirees aren’t being penalized for having saved all that money and doing everything they were told to do all their lives.
We’ve been told: “save money and put it in bonds, so when you retire you can earn an income.”
That’s been the narrative that Americans, baby boomers have been told, since they were working – since the 70s.
And you know what? The deal really changed on them!
Baby boomers who really should have been collecting safe income every month have had to actually go and try to figure out how to earn money without destroying their retirement funds.
Which makes it very difficult.
Do you find this to be true for you? Hit reply and let me know – I’m glad to be back online and I love hearing from you.
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“The Buck Stops Here”
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