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.

Outlines

00:00

📉 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.

05:00

💹 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.

10:03

🔍 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.

Keywords

💡Interest rates

Interest rates refer to the cost of borrowing money, often set by central banks like the Federal Reserve (FED). In the video, the FED's decision to lower interest rates by 0.5% is discussed as a significant economic event that impacts markets, particularly because lower interest rates can shift investment behavior by making borrowing cheaper and reducing returns on bonds.

💡Federal Reserve (FED)

The Federal Reserve (FED) is the central banking system of the United States, responsible for setting monetary policy, including interest rates. In the video, the FED's actions in lowering interest rates are a central topic, as these decisions affect inflation, investment behavior, and overall economic conditions.

💡Stock market

The stock market is a public market for buying and selling company shares. The video focuses on how the stock market reacts to changes in interest rates, with lower rates potentially pushing investors toward stocks as bond yields fall, which could cause stock prices to rise. However, the video also highlights uncertainties and historical mixed results regarding market performance after rate cuts.

💡Bonds

Bonds are fixed-income securities that represent loans made by investors to borrowers, typically governments or corporations. The video explains that when interest rates fall, bond yields also drop, leading investors to move their money from bonds into stocks. This shift is based on the lower return from bonds in a lower-rate environment.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power. In the video, the decline in inflation to 2.5% is a key factor leading the FED to reduce interest rates. As inflation falls, the FED adjusts monetary policy to prevent the economy from slowing down too much.

💡Price-to-earnings (P/E) ratio

The Price-to-Earnings (P/E) ratio measures a company's current share price relative to its per-share earnings. In the video, the speaker discusses how lower interest rates can cause stock valuations to rise, often reflected in a higher P/E ratio. For example, the S&P 500's P/E ratio is highlighted as being high historically, which may indicate expensive stock prices.

💡Yield

Yield refers to the earnings generated and realized on an investment over a particular period of time. The video discusses bond yields and stock yields in the context of investment decisions, explaining that when bond yields are higher than stock yields, investors might prefer bonds, but when yields drop with interest rate cuts, stocks may become more attractive.

💡Recession

A recession is a significant decline in economic activity across the economy that lasts for an extended period. The video mentions mixed signals regarding whether lower interest rates will lead to a stock market rally or a recession, referencing past periods where rate cuts were followed by recessions.

💡S&P 500

The S&P 500 is a stock market index that tracks the performance of 500 of the largest publicly traded companies in the U.S. The video uses the S&P 500's historical performance data, particularly its P/E ratio, to analyze how the stock market has responded to past interest rate cuts and to gauge potential future performance.

💡Forward price-to-earnings ratio

The forward price-to-earnings (P/E) ratio is a measure that uses forecasted earnings to evaluate the current price of a stock. In the video, the forward P/E ratio is used to predict potential future returns of the S&P 500, with the current ratio suggesting lower future returns, adding caution to market expectations following the FED's rate cuts.

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