The Fed concluded its last meeting of the year and as was
expected, lowered interest rates by a quarter of a percent. This marks
the third cut in a row and a total of a one percent decrease from the
peak. The big question is how much further and how quickly they will
lower rates in 2025. The market took a bit of a hit as the Fed hinted it
would lower rates fewer times in 2025 than previously expect; however,
their predictions on rate cuts have yet to be accurate in the recent past, so
that doesn’t mean too much for next year. The economy has continued to
slow from its overheated state of a couple of years ago and is nearing
something much more normal. So further rate cuts are likely to happen in
2025. At the moment, we are hoping for roughly another 0.5% to 1% in cuts
next year.
Continuing rate cuts should have a stimulative effect on the
economy. Once we see rates at a more neutral level, we expect to see the
economy level out at a reasonable growth rate. We can use real estate as
an example of how lower rates will help the economy. Last October, the
average 30-year Mortgage was at about 7.9% and now it is at 6.8%. At
7.9%, a $400,000 loan over 30 years would carry a payment of $2,907. At
6.8%, the principal and interest payment would be $2,607. That means that
the cost to spend $400,000 dropped by $300 per month in the last year or so,
allowing people to have more purchasing power with their current budget.
Hopefully in a year or so we will see rates in the mid to high five percent
range which could shave off another few hundred dollars per month.
Interest rates don’t only affect real estate, they also
affect auto purchases, credit lines, and corporate borrowing. A company
can borrow far more money for the same payment amount if interest rates are
lower. This allows for more investment in things like plants, property,
and equipment. These investments will hopefully pay off through larger
revenues and profits in the future. The net effect of these lower
interest rates can be huge as every dollar more that a consumer can spend, adds
to the bottom line for publicly traded companies.
Our outlook is heavily dependent on the Fed actions for next
year. We don’t expect major changes to the tax code, and the PE ratio of
most stocks is still reasonable. So an environment of lowering rates
should give a positive bump to the stock market. Our current expectation
is that we won’t see the market overpriced as a whole until late next year or
the year after. This could of course change, but as of right now, most
people seem to be positive about the market in 2025.
For these reasons, we don’t see major changes to our
portfolios in the next few months. As PE ratios climb, we will get more
conservative, but there is still some room for those to grow in our
opinion. As always, if you have specific questions, don’t hesitate to
reach out.
