Sell Stocks at All Time Highs? What to do Now That the FED Has Lowered Rates
Summary
TLDRThe video discusses the Federal Reserve's recent decision to lower interest rates by 0.5%, exploring its potential impact on the stock market. It explains how declining interest rates typically lead to higher stock valuations as money flows from bonds to equities. The video also examines mixed signals from historical data on whether rate cuts cause stock prices to rise or fall. While acknowledging uncertainty in market predictions, the creator emphasizes the importance of long-term investing in undervalued, high-quality stocks over attempting to time the market or predict short-term fluctuations.
Takeaways
- 📉 The FED has lowered interest rates by 0.5%, which has caused mixed reactions on social media, even though the market had been anticipating it.
- 📊 The FED's dot plot now predicts interest rates to be at 4% by the end of 2025 and 3.25% by the end of 2026, with long-term rates below 3%.
- 📈 Lower interest rates tend to cause money to flow out of bonds and into stocks, as lower bond yields make stocks more attractive for investors seeking higher returns.
- 💼 Historically, stock valuations rise when interest rates fall, and fall when interest rates rise due to the relationship between bond yields and stock prices.
- 🤔 There is no consensus on how the stock market will react to the FED's rate cuts, with some predicting a rally and others fearing a recession.
- 📉 Historical data shows that in only two out of the last eight rate cuts since 1984, the S&P 500 was lower one year after the cut.
- 🔮 No one can predict with certainty how the market will react to rate cuts, as past data shows mixed outcomes.
- 💡 The current price-to-earnings ratio of the S&P 500 is high, suggesting potentially lower returns in the coming years compared to bonds, which offer higher yields.
- 📉 Historical comparisons to periods like 1969, 1973, 1987, and 2000 show that when stock yields fall below bond yields, the market often underperforms.
- 📈 Despite mixed signals and high valuations, the speaker remains fully invested in the stock market and focuses on owning high-quality, undervalued stocks for the long term.
Q & A
What does the FED lowering interest rates by 0.5% signify?
-The FED lowering interest rates by 0.5% signifies a shift in monetary policy to stimulate economic growth, often in response to lower inflation or economic challenges. Lower rates make borrowing cheaper, encouraging spending and investment.
Why did some people react strongly on social media to the FED's rate cut when it was anticipated?
-Despite being anticipated, the rate cut can cause strong reactions because of uncertainty around its impact. While some expected markets to rally, others feared the cut could signal economic weakness, leading to mixed reactions.
How do lower interest rates affect the stock market, according to the speaker?
-Lower interest rates tend to push investors out of bonds (which offer lower yields as rates decline) and into higher-yielding assets like stocks, potentially raising stock valuations.
What is the relationship between interest rates and the stock market based on historical data?
-Historically, lower interest rates have often been associated with higher stock market valuations, as money flows from lower-yielding bonds to stocks. However, there are exceptions, with stocks sometimes falling after rate cuts, depending on other economic factors.
What conflicting signals are social media users giving about the impact of the FED's rate cut?
-Some social media users claim that previous rate cuts have led to stock market crashes, while others point out that historically, stocks have risen after rate cuts. The truth is that the market response to rate cuts varies, and no one can predict with certainty what will happen.
What does the speaker think about trying to predict stock market movements after rate cuts?
-The speaker believes that no one can accurately predict stock market movements after rate cuts. Instead of trying to guess, the speaker focuses on owning high-quality businesses and makes no changes to their investment strategy based on macroeconomic events.
What does the speaker believe about the current valuation of the S&P 500?
-The speaker believes the S&P 500 is currently overvalued, with a high price-to-earnings ratio. This suggests that future returns might be lower, especially compared to bonds, which are offering higher returns.
How does the speaker's investment strategy differ from Warren Buffett’s?
-The speaker's investment strategy differs from Buffett's because Buffett deals with much larger amounts of capital, limiting his ability to invest in smaller companies. The speaker, dealing with a smaller portfolio, has access to more investment opportunities, especially in small-cap stocks.
Why does the speaker continue to stay fully invested despite believing the market is expensive?
-The speaker stays fully invested because they believe in the long-term growth of the businesses they own, regardless of broader market conditions. They do not try to predict market movements but focus on buying high-quality companies at attractive prices.
What role do emotions play in stock market movements according to the speaker?
-The speaker notes that emotions often drive short-term stock market movements, but over the long run, the market will always align with fundamentals. This suggests that while short-term volatility can be influenced by human behavior, long-term market performance is based on company earnings and valuations.
Outlines
📉 FED Lowers Interest Rates: Confusion in the Market
The FED has lowered interest rates by 0.5%, causing mixed reactions across social media. While some expected the move, others are surprised and speculating its impact on the stock market. Some believe lower rates will push stocks higher, while others fear a market crash. The video aims to provide a logical analysis of the situation, exploring whether it's time to buy or sell, as the FED forecasts further rate cuts due to falling inflation.
💹 The Relationship Between Interest Rates and Stock Valuations
As interest rates decline, investor money tends to flow out of low-yielding assets like bonds and into higher-return options like stocks. Historically, when interest rates drop, stock valuations rise due to lower returns on bonds. This was seen in 1971 when interest rates were low, and stock valuations were high. Conversely, during times of high interest rates like in 1980, stock valuations plummeted. The inverse relationship between bond yields and stock prices is an ongoing equilibrium driven by investor behavior, suggesting that stock prices could continue to rise as interest rates fall.
🔍 Mixed Reactions to Rate Cuts: What History Tells Us
There are conflicting opinions on how rate cuts will impact the stock market. Some point to past recessions following similar cuts, while others highlight periods where the market rose after rate reductions. Historical data shows mixed results, with the S&P 500 rising after some rate cuts and falling after others. Therefore, it’s impossible to predict with certainty how the market will react, as no one can know for sure how stocks will behave in response to interest rate changes.
📊 Evaluating Stock Yields vs. Bonds: Are Stocks Overvalued?
The current price-to-earnings ratio of the S&P 500 suggests stocks may be overvalued, with lower expected returns compared to bonds. Data from historical periods when stock yields were lower than bond yields often led to market corrections, indicating that stocks might not be the best investment compared to bonds at this time. Investors should focus on the earnings yield of the S&P relative to bond yields and avoid entering the stock market if stock yields remain below bond yields.
🔮 Staying Invested Despite Market Uncertainty
Although the S&P 500 seems expensive and may produce lower returns, the creator continues to stay fully invested in the stock market. The portfolio doesn't rely heavily on the S&P, as it consists of individual stocks that are not part of the index. These stocks offer better value and growth potential. The creator emphasizes the importance of focusing on businesses with strong fundamentals rather than worrying about the broader market trends, interest rates, or inflation.
🛑 Ignoring Macroeconomic Factors: Focus on What You Control
Despite concerns about the broader economy, the creator stresses focusing on individual businesses and buying them at attractive prices. Warren Buffett's large cash position is discussed, but it’s noted that comparing a small investor's situation to Buffett's is irrelevant. Buffett’s massive capital limits his investment choices, while smaller investors have more flexibility. The key takeaway is that opportunities for undervalued stocks exist in any market, and investors should focus on finding those rather than worrying about macroeconomic conditions.
Mindmap
Keywords
💡Interest rates
💡Federal Reserve (FED)
💡Stock market
💡Bonds
💡Inflation
💡Price-to-earnings (P/E) ratio
💡Yield
💡Recession
💡S&P 500
💡Forward price-to-earnings ratio
Highlights
The FED has just lowered interest rates by 0.5%, causing widespread reaction on social media, with some predicting stock market growth and others fearing a crash.
Despite anticipation of the rate cut, the market reacted strongly, and many are surprised by its potential impact.
Investors often move money from interest-rate-dependent assets like bonds to higher-yielding assets like stocks when rates are lowered.
Historically, when interest rates fall, stock valuations rise due to lower bond yields, making stocks more attractive to investors.
The FED expects interest rates to be at 4% by the end of 2025 and around 3.25% by the end of 2026.
Over the long run, the FED expects interest rates to be at or below 3%, signaling a shift towards lower interest rates.
Mixed reactions on social media highlight uncertainty, with some historical data showing stock market gains after rate cuts, while others show declines.
Between March 1971 and June 1974, rising interest rates caused the S&P 500 price-to-earnings ratio to drop significantly.
When interest rates were at their peak in 1980 (20%), the S&P 500 price-to-earnings ratio dropped to 6.79, showing a direct correlation.
When bond yields are higher than stock returns, money tends to flow into bonds, as they offer a safer, higher return.
Historical data suggests no clear pattern on whether rate cuts lead to market gains or losses, making predictions speculative.
Based on the S&P 500’s current forward price-to-earnings ratio, the market is expected to see low returns over the next 1 to 5 years.
The speaker doesn’t make portfolio adjustments based on market forecasts, instead focusing on investing in high-quality businesses for long-term growth.
The price-to-earnings ratio of the S&P 500 is currently 29.9, suggesting stocks are expensive and possibly overvalued compared to bonds.
Despite market uncertainty, the speaker remains fully invested in the stock market, focusing on individual stock valuations rather than macroeconomic conditions.
Transcripts
the FED has just lowered interest rates
by
0.5% and it seems like everyone on
social media is freaking out about it I
have to be honest I didn't know the FED
lowering interest rates was going to be
such a big deal when I thought everyone
was already expecting them to do so and
the market has been rallying for months
in anticipation of the FED lowering
interest rates now that the FED has
lowered interest rates everyone is
acting like it's a surprise and that
it's going to impact the markets in a
major way I am also seeing some people
people say that lower interest rates are
going to cause stocks to go higher and
others saying that this means we're
headed for a stock market crash so
what's going on is it time to buy or
sell and what am I doing now that
interest rates are officially headed
lower we're going to discuss all of
these questions in today's video while
trying to stay logical and focused on
the facts as much as possible so with
that being said let's op into today's
video all right so this is the infamous
fed dotplot which shows where the FED is
expecting interest rates to go over the
next few years the FED is now expecting
interest rates to be at 4% by the end of
2025 and around 3.25% by the end of 2026
then they are expecting interest rates
to be at or below 3% over the long run
so the FED has officially started
lowering interest rates and is expecting
them to continue going lower the reason
for this is because inflation has
continued to come down and the last
reading was
2.5% this is back in line with
historical inflation level levels so now
that inflation has come back down and is
continuing to Trend downward the FED has
moved to lowering interest rates the
question is what happens now money will
naturally flow out of interest rate
dependent assets like bonds and into
other higher yielding assets like stocks
in my book I wrote about the
relationship between interest rates and
stock valuations and how when interest
rates fall stock valuations rise this is
because investor dollars are always
looking for the highest returns
therefore when interest rates fall and
the Returns on bonds fall with them more
investors will leave bonds and enter
back into the stock market this is just
like how when interest rates rise stock
valuations fall as the return on bonds
increase essentially investors are
always looking at bonds and stocks and
when bonds have higher yields more money
flows into them but when bonds have
lower yields more money flows out of
them and back into the stock market this
is also why the stock market shot up to
new highs on Thursday because money was
clearly leaving bonds to enter back into
the stock market this has and always
will be the case for example in March of
1971 interest rates were at 3.75% and
during this time the price to earnings
ratio of the S&P was
19.61 however by June of 1974 interest
rates skyrocketed to 13.6% and the price
to earnings ratio of the S&P responded
by dropping to
8.95 the peak of the FED funds rate rate
was in March of 1980 at 20% and during
that time the S&P price to earnings
ratio was only at
6.79 and ask yourself if Bonds were
offering 20% today would you sell some
of your stocks and lock in a guaranteed
20% return my answer would be an
absolute yes which means I would be
selling almost every stock if not every
stock to go and buy bonds and if I would
do this then so would millions of other
investors which would cause a mass
massive amount of selling in the stock
market so there's a constant equilibrium
between the yields of bonds and stocks
caused by investors moving money into
whichever one is offering higher returns
and this shift is caused by whatever
interest rates are doing based on this
logic it would suggest that now that
interest rates are declining stock
prices should continue to rise however I
am seeing many mixed signals on what
happens next from people all over social
media for example the this person says
that the last two times the FED cut
interest rates by 0.5% the stock market
fell and we entered deep recessions
however another Twitter account is
quoting JP Morgan by saying that over
the past 40 years the FED has Cut Rate
12 times and every time the stock market
was higher one year later with an
average gain of 15% I also found this
screenshot of the S&P performance one
year after historical rate cuts and you
can see that the data is kind of all
over the place but in only two out of
the eight rate Cuts since 1984 the S&P
500 was lower so to say that rate cuts
are guaranteed to drop the market is
false but to also say that rate cuts are
going to cause the market to rise for
sure is false as there has been periods
where stocks fell after the FED cut
interest rates so what is the truth will
stocks be higher or lower after interest
rate Cuts well the truth is that
absolutely no one has any idea and no
one knows the thing is that social media
influencers and investors won't tell you
that because they want their followings
to believe that they know what they're
talking about and want to seem like they
are experts that know what is going to
happen because this is why people follow
them but the truth is that they don't
know what's going to happen I don't know
what's going to happen and you don't
know what is going to happen anything
anyone says is just a guess and pure
speculation so with that being said let
me share what my personal speculation is
now this chart right here from JP Morgan
themselves shows us the future returns
of the S&P 500 relative to the forward
price to earnings ratio and based on
where the S&P 500's current forward
price to earnings ratio is the average
one-year returns that followed are just
above 0% the average 5year returns that
followed are roughly 3% so when the
market has historically been this
expensive its one and 5year returns have
been quite low the S&P price earnings
ratio is at 29.9 today which is an
earnings yield of roughly
13.3% Additionally the 10-year
Government Bond is sitting at 3.7% today
which means that the S&P 500 is not
offering a higher yield than bonds as
Benjamin Graham wrote in the intelligent
investor this suggests that the S&P is
no longer offering a margin of safety
today due to stocks offering lower
yields than Bonds in other words
investors could actually be getting a
higher risk-free return in bonds than
stocks in my book The fundamentals of
investing I also discuss how this has
happened four times throughout history
and I also show this chart right here
where the S&P 500's earnings yield was
VI low interest rates and bond yields
the arrows point to the four occurrences
which were in 1969 1973 1987 and in 1999
to 2000 the following table shows the
returns of the S&P 500 over the next 1
to 3 years from its peak during these
years as well as the time it took for
the market to make a new high figure
5.11 shows that it took 3 years after
1969 7 years after 1973 and 2000 and 2
years after 1987 for the market to reach
new highs however we can see that in all
of these time frames the market produced
negative returns over the next 2 years
and had very sharp declines there was a
stock market crash in each of these four
years as well there was a 2-year bare
market after 196 69 the 1973 crash
created the second longest bare Market
since the Great Depression the infamous
so-called Black Monday occurred in 1987
when the stock market plummeted over 20%
in just one week the peak of the dotom
bubble was in the year 200000 which was
followed by a 3-year decline to the S&P
500 this data suggests that when the
earnings yield of the S&P fell below the
yields of both bonds and interest rates
stocks consistently had negative returns
in the following years it also suggests
that this could be an indicator that
stocks are overvalued and due for a
correction there is logic behind this
relationship too when the yields of
stocks are lower than bonds and interest
rates it means that investors could be
getting higher returns by investing in
bonds and or holding cash and are
accepting lower returns for higher risk
by investing in stocks instead logically
when stock yields are lower than bonds
and interest rates it suggests that cash
and bonds are actually the better
investment and new money should not be
entering ing the stock market the fact
that investors have done this in the
past is just another example that humans
are not always logical however as
Benjamin Graham says in the short run
the market is a voting machine but in
the long run it is a weighing machine
eventually the market will always
outweigh human emotion and return to its
fundamentals how you can apply this to
your own investing is to pay attention
to the earnings yield of the S&P versus
bonds and interest rates if stock yields
are below the other rates then do your
best to stay r about the price of stocks
and what they are offering relative to
other Investments if stock yields are
well above other rates then you can
capture potential higher yielding
opportunities in the stock market the
next chapter will help you find these
opportunities by showing you how to
analyze and think about individual stock
valuations and using real world examples
to do so so to summarize the S&P 500's
price to earnings ratio is very high
right now I believe the S&P 500 is also
already pricing in the rate Cuts bonds
are still offering higher returns than
stocks which means the S&P is not
selling for a margin of safety based on
the historical data it suggests that
stocks are expensive and most likely
will produce lower returns going forward
so the next question is what am I doing
based on all of this data the answer is
nothing I am making absolutely zero
changes to my portfolio and how I invest
I am also sitting on basically 0% cash
and I am fully invested in the stock
market why because because I don't know
for certain what is going to happen and
I don't try to predict where stock
prices are going to go if you have been
watching my channel for some time then
you know that I have been saying that
the S&P is expensive for over a year now
and it just continues to go up just
because it's expensive does not mean
that it won't keep going up or that it
is going to crash soon so even though I
think the market is expensive today and
that the S&P will probably produce low
returns I keep investing and this is
also largely because I don't own the S&P
or many of the stocks that are in it the
only stocks that I own that are in the
S&P are Google and Amazon every other
stock isn't in the S&P and therefore my
portfolio performance should not depend
on what the market is doing I own many
individual stocks that I think are
selling for attractive prices relative
to their fundamentals my stocks are
almost all trading for significantly
lower prices than the S&P and growing
faster as well this should lead to
outperformance and to continued growth
in my portfolio regardless of what the
market does therefore I don't really
care about the S&P its price or what I
think it will do in the future because I
own highquality businesses that I
believe are selling for attractive
prices and I continue to buy them
whenever I have more cash the macro just
simply does not matter to me because all
I'm trying to do is own great businesses
that I believe will grow over the long
term regardless of what inflation or
interest rates are doing I don't think
there's any point in worrying about this
stuff since it's out of my control so
instead I focus on what is in my control
which is the businesses that I own and
the prices that I buy them for I also
know that Buffett is sitting on a record
amount of cash right now and people will
probably say that he's preparing for a
crash but you have to understand that
Buffett is no longer a regular investor
Buffett is working with hundreds of
billions of dollars which means his
investable universe is maybe 50 stocks
that's all he can invest a meaningful
amount of money into at this point for
me there's tens of thousands of stocks
to choose from for example I could put
my entire portfolio into a $200 million
market cap stock tomorrow no problem but
for Buffett if he bought the entire
company it would be only
0.1% of the birkshire hathway portfolio
then if this company goes on to 10x it
would make me a 1,000% return but it
would make Buffett a return of only 1%
so smaller cap companies are completely
out of the question for Buffett now as
he simply can't deploy meaningful
amounts of money into them but for me I
can easily put my entire portfolio into
these stocks and have them be extremely
meaningful to My overall returns so to
compare Buffett's cash position with my
own makes absolutely no sense because my
investable universe is significantly
wider and therefore there are
significantly more investment
opportunities I also believe that if
Warren Buffett had a $1 million
portfolio today then he would be fully
invested in stocks as he would find
undervalued Opportunities because they
do exist in every stock market condition
I strongly believe that and I have also
found many undervalued stocks even in
today's markets you just have to be
willing to look do the work and know
what to look for my channel is dedicated
to helping you find these undervalued
stocks and my patreon is where I share
all of my smaller cap stocks and
Analysis so if you're interested in
sticking around then subscribe to my
channel and if you're interested in
getting access to my full portfolio
small cap stocks and so much more then
consider joining my patreon as well but
with all that being said that is going
to wrap up the video for today everyone
and if you did enjoy this video then
please remember to leave a like on it as
it does really help out my channel and I
truly do appreciate it and with all that
being said thank you all again so much
for tuning in and I really hope to see
you all again in my next video
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