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Value Investor Daily #40
Fed Cuts Rates 50 Points, What Does It Mean for Stocks?
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With CPI at 2.5% and unemployment at 4.2%, the Federal Reserve cut interest rates by 50 basis points to a new target rate of 4.75%-5%.
What does it mean for stocks?
Are we going to go into a bear market? A recession? Or will we rally?
Of course, no one knows, but let’s look at history and glean some insights.
Since 1929, 86% of the time, stocks have been up one year following the first rate cut.
The average return one year out is 11%.
What about when there was a recession? On average, stocks were up 8% one year after a rate cuts followed by recessions.
What if we look five years out?
Since 1970, when a rate cut coincided with a recession, returns have been strong, up an average of 84% in the five years following the cut.
What happens to actual interest rates?
Rates fall in anticipation of rate cuts by an average of 90 basis points in the 63 days preceding a rate cut.
Federal Reserve Board
This time was no different. Rates have fallen 130 basis points since last October.
Mortgage rates have dropped from 7.8% to 6.29%.
What can we expect in this cutting cycle?
The Fed projects they will drop the Fed Funds Rate to 3% by 2026.
FRED
GDP growth in 2025 is projected at 2%.
What does it mean for investors?
Looking out five years, since 1970, the market has always been up. But there will be plenty of volatility along the way.
If we enter a recession, shares of quality companies will start to trade at significant discounts—perfect timing for value investors to seize the opportunity.
As Warren Buffett said in his 2016 annual letter, “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.”
Whiskey: A Hedge Against Market Volatility
Looking to protect your portfolio from the next recession?
Consider investing in rare spirits like whiskey.
Whiskey investing provides a proven hedge against stock market dips driven by inflation and other factors.
With Vinovest, you can invest in high-growth segments such as American Single Malt, emerging Scotch, Bourbon, and Irish whiskey. Thanks to established industry relationships, Vinovest overcomes industry barriers that have made historically whiskey investing expensive and opaque. As a result, you can enjoy high-quality inventory that boosts your portfolio value and enhances liquidity.