Sell Stocks at All Time Highs? What to do Now That the FED Has Lowered Rates

Summary

The 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.