Lower Rates

October 2024

I am optimistic about the markets over the next several months. I think stocks go higher from here.

The economy is doing well at the moment. Inflation is coming down and is tolerable. The Fed has begun a campaign of interest rate cuts.

When the Fed wants to make the monetary world a friendlier place, it’s been a profitable practice for decades for investors to go along: falling rates are better for businesses and borrowers.

Everyone - the stock market, the bond market, the rest of the world that largely matches our monetary policy moves - expected the Fed to start these rate cuts. You could argue stock prices already reflect all there is to know. The debate going forward is how much do they cut by. And this is determined by how the economic data comes in.

The economy is good, but it’s not invulnerable. Historically, when the Fed starts to lower rates, a recession is about to begin. See below: the squiggly line is the rate the Fed controls, and the vertical lines are recessions. For today to be a healthy economy amid falling rates is a “it’s different this time” or “too good to be true” scenario.

So let’s not ignore the weak spots in our economy. Nor minimize the instability in the Middle East.

Why be bullish? Because when you calculate the value of a security, the value goes up when the interest rate goes down. This is powerful mathematically, and the essence of Don’t Fight The Fed. Even if a recession were to occur in 2025, it does’t mean stocks won’t go up.

We should still expect volatility. Be it bold (or reckless) campaign promises, inconclusive election results, or messy military tactics in the Middle East or Eastern Europe, markets will surprise us. We’ll keep our portfolios diversified. But with a Fed signaling easier money is on the way, real estate should loosen up, borrowing will incrementally be more attractive, and one of the economic weak spots - rising delinquencies - should slow.

I still fear that the next President will continue spending carelessly - and one day it will matter - and I still believe large cap tech has been on a disproportionately long run of outperformance relative to other areas of the market. But I can’t ignore the tailwind that the Fed is blowing at investors’ backs.

Sincerely,

Chip