The Fed concluded its hotly anticipated meeting where they
cut rates by 0.5%. This turning point in monetary policy has been what
the markets have been waiting for. This is relevant because it lowers both the borrowing costs of everyone from consumers to big businesses and the Government, allowing them to purchase more for a lower payment. This generally leads to more spending. Lowering the interest rate also reduces the competition that the stock market faces. For example, if you can invest on a guaranteed basis at 5% or risk your money in the stock market, you might have a tough decision. If the question is a 3% guaranteed basis or the stock market, the decision weighs more heavily towards stocks. While we aren’t there yet, this will continue to be an argument for moving money to the stock market as the Fed continues to lower interest rates going forward.
The headline rate just dropped by half a percentage point to
4.75%-5% and the outlook currently shared by Fed members is showing further cuts in the coming year that might take us down in the low 3%
range. While this outlook can change, it is good to see they are currently projecting relatively rapid rate cuts. A move that large in the interest rate market should spur spending and the stock market over the next couple of years. There is some worry that the 0.5% cut was too large and signaled that the Fed believes there is too much weakness in the economy, but I don’t see much evidence of that. Compared to the overheated state it has
been in for the last couple of years the economy is slow, but that is exactly
what they have been trying to accomplish. It is still very strong and unemployment at 4.2% is actually still a low number historically. They
also can be extremely nimble if they need to change policy as we have seen in the last couple of decades.
In terms of portfolios, this should be another tailwind for the economy and the market, so we remain optimistic and hope for some upside before we see stocks get to an overbought level. Once we see that we will rebalance. For now, we are waiting for the market to move based on this and future expected rate decisions.
As always if you have any questions don’t hesitate to reach out to us.
