Fed Cuts Rates 0.5%. What's Next for Stocks?

Summary

In this video, the Federal Reserve's first interest rate cut in four years is discussed, which was larger than expected at 50 basis points. The market initially fell but rebounded the next day, reflecting the positive sentiment towards the rate cut. The video explains the historical impact of rate cuts on the market and the current economic indicators suggesting a strong economy. It also highlights sectors like small-cap companies and consumer discretionary that could benefit from lower interest rates. The presenter advises staying invested in quality stocks despite short-term market volatility and provides technical analysis insights, including moving averages to gauge market trends.

Takeaways

• 📉 The Federal Reserve made its first interest rate cut in 4 years, reducing rates by 50 basis points, which was larger than the 25 basis points most banks anticipated.
• 📈 Despite initial market decline post-announcement, stocks rebounded strongly the following day, indicating market approval of the rate cut.
• 💹 The Federal Reserve's action was anticipated by the CME Futures Market, which had a 60% probability prediction of a 50 basis points cut.
• 🔽 The Federal Reserve's rate cut from 5.5% to 5% is still considered restrictive given the current inflation rate of around 2.5%.
• ⏳ The Federal Reserve aims to lower the rate to approximately 3% over the next couple of years, with further cuts expected by the end of this year.
• 💰 Lower interest rates are beneficial for dividend stocks and could lead to a bullish stock market, contrary to some expectations of market drops following rate cuts.
• 📊 Historically, the market's reaction to rate cuts depends on the economic environment; cuts during strong economies tend to boost markets, unlike those during recessions.
• 🚫 The speaker advises against trying to time the market based on short-term macroeconomic news, emphasizing the importance of staying invested in quality stocks.
• 📊 The speaker predicts that if the economy continues to grow, the stock market could potentially rise by 15% in the next 12 months, but a recession could reverse this trend.
• 📈 The speaker remains bullish for the next 6 to 12 months, identifying small-cap companies and consumer discretionary stocks as sectors that could outperform the market.

Q & A

What was the Federal Reserve's first interest rate cut in 4 years?

The Federal Reserve made their first interest rate cut in 4 years by 50 basis points or 0.5%, which was larger than the 25 basis points that most banks expected.

How did the market initially react to the Federal Reserve's interest rate cut?

Initially, after the interest rate cut, the market went down, possibly due to fears of a market crash reminiscent of the last time the Fed cut rates.

What was the Federal Reserve's target for the Federal funds rate in the short term?

The Federal Reserve aimed to bring the Federal funds rate down to about 3%, which was expected to take about one or two years, depending on incoming data.

Why is a lower interest rate generally considered bullish for stocks?

Lower interest rates can be bullish for stocks because they reduce borrowing costs for companies, which can fuel business expansion, and also make dividend stocks and bonds more attractive relative to savings accounts, leading to increased investment in these assets.

What is the significance of the 50 and 150 moving averages in determining market trends?

The 50 and 150 moving averages are used in technical analysis to determine market trends. A bull market is indicated when the 50 moving average is above the 150 moving average and both are sloping upwards. Conversely, a bear market is suggested when the 50 moving average crosses below the 150 moving average and both start to slope downwards.

How does a weaker US dollar impact companies in the S&P 500?

A weaker US dollar benefits companies in the S&P 500 as it makes their products and services more competitive and cheaper in foreign markets, potentially increasing exports. Additionally, multinational companies can convert foreign earnings into more US dollars, boosting their revenues and profits.

What is the difference between the Federal Reserve cutting rates due to a recession versus normalizing interest rates?

When the Federal Reserve cuts rates due to a recession, it's an attempt to stimulate the economy and prevent a market crash. In contrast, normalizing interest rates is done when the economy is strong and the previous rate increases were due to high inflation. Normalizing rates is seen as bullish for the stock market.

What are the potential outcomes for the stock market in the next 12 months according to the script?

The potential outcomes for the stock market in the next 12 months are either a rise of about 15% if the economy continues to grow, or a drop of 15% if the economy goes into a recession. The actual outcome depends on the state of the economy and cannot be predicted with certainty.

Why might small to medium-sized companies benefit more from lower interest rates?

Small to medium-sized companies typically have more debt and less cash on their balance sheets compared to larger companies. Lower interest rates can reduce their borrowing costs, making it easier for them to finance growth and operations, which can lead to outperformance in the market.

What is the significance of the bull trap pattern mentioned in the script?

A bull trap pattern in the market indicates a false signal of a new uptrend. If the market closes below a recent high after making a new intraday high, it could suggest that the uptrend is not sustainable and the market may drop back down to previous support levels like the 50 or 100 moving averages.