Fed Rate Cut & Election Wrap-Up – Key Takeaways:
Here are some key takeaways:
1. Markets prefer certainty: The stock market tends to react positively after major events like elections, regardless of the outcome, as it reduces uncertainty.
2. Multiple factors influence markets: While elections and Fed Rate cut decisions are significant, they are not the only factors affecting market movements.
3. Short-term reactions can be misleading: Immediate market reactions to events like elections or policy announcements may be short-lived and don’t necessarily indicate long-term trends.
4. S&P 500 milestone: The S&P 500 recently hit 6,000 for the first time, marking the shortest period to move 1,000 points in its history (about seven months from 5,000 to 6,000).
5. Long-term investing: Despite periodic downturns, staying invested in the market over the long term has historically yielded significant returns. As an example, the S&P 500 has grown from 666 in 2009 to 6,000 in 2024.
6. Market momentum: Markets can remain overbought or oversold for extended periods, defying expectations of immediate reversals.
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Fed Rate Cut & Election Wrap-Up – Transcript
We had a busy week last week. We’re recording this in the middle of November, the week after the presidential election and the Federal Reserve meeting in November. Busy week, markets were busy last week.
It was a big anticipatory event. Even though the election is on the calendar and everyone knows the date going into it, there’s always some volatility, some concerns, a lot of crazy headlines flying around about what could happen, what could go wrong. But we got a decisive outcome in the presidential election.
And I think one overall theme that we’ve seen as a key takeaway here is that markets like certainty. Yeah, they definitely do. And you know, this time around we had a decisive outcome. We know everything is pretty much settled at this point.
But even in 2020, the market reacted in a similar fashion, and we didn’t really know the final outcome of the presidential election until January. So I think just getting past that day in early November, like you said, everybody kind of just exhales. And it’s like, on to the next thing.
Even if they don’t know the outcome, it’s just like that day has passed, you know, and it’s time to move on to the next thing. Let’s get back to making money.
I think that’s a good point that we should underscore: there was this relief rally, if you want to call it that, after election day had passed. How many calls do we take every year before, or I guess every four years before, a major election like this where people say, “I want to do something really stupid before the election in case something goes wrong”? I mean, we heard it a lot.
This time around we heard it, four years ago we heard it. But what Tim said should underscore the fact that the election actually has very little impact on what’s happening in the markets. Yeah, and to even further that point, regardless of who won or who lost, the market had a pretty similar reaction in 2020 when a Democrat won and in 2024 when a Republican won.
We didn’t know the outcome in 2020 until January. This time around we knew it the next day. The market just wants to get past this regardless of who wins or loses and kind of just continue to chug along.
Yeah, you have to deal with the fallout in the sense that okay, if we had a Democratic candidate win, okay. The next day, what are the repercussions? What do we need to do? What do we need to start thinking about?
What happens when a Republican wins? What’s going to happen? What is the agenda going to look like? And let’s move forward. Like Casey said, the market just likes certainty.
Right, and I think to your point, Tim, about the 2020 election, and to the broader point of elections not being the only thing that move markets, markets are complex systems, there’s a lot of inputs that go into it. In 2020, I think around the election, we also had the announcement of vaccines for COVID.
So that could have been what moved the market. It wasn’t necessarily the fact that it was a presidential election. There was a lot of other stuff going on.
At that time there was a lot of other stuff going on this time around. We were in the midst of two interest rate cuts (Fed rate cuts) in a row from the Federal Reserve. They cut initially by 50 basis points. The Fed rate cut was 25 basis points this past week.
So, not to say that the Fed is necessarily moving markets either, but it is a kind of interesting environment that we’re in where, you know, we were up—S&P 500 was up around 20 percent heading into this election, into the last week, and we saw a pretty big jump up in the S&P 500, small caps, some individual stock names, some individual sectors.
So, do you think this market reaction is overdone?
Do you think things are getting too extended here in the market? Are we getting too ahead of ourselves pricing in certain outcomes based on the Fed rate cut meeting and the presidential election? I think there’s a knee-jerk reaction that we’re seeing right now as we’re recording this, where certain sectors of the market have gone (pretty much) straight up in the last few days.
And I say knee-jerk reaction because we used to see this after elections, we would see it. Amazingly, after a State of the Union address where, you know, the president would get up in front of Congress and would talk about some crazy idea. It’s basically a wish list.
And the next day, certain stocks and certain sectors would just take off like rocket ships, and it was really just a short-lived phenomenon that we saw. I think you could attribute certain parts of the market doing well to different things. I mean, when you see rates being cut, things like small-cap stocks tend to do well.
So maybe the small-cap rally here had more to do with the Fed rate cuts, than it did the election, or maybe it was an equal reaction to both. But I think people just like to kind of attribute one thing—X caused Y. And this is why these things happened, and really it’s just kind of a combination of everything.
I don’t really know if things are too extended at this point or if they can’t continue. I mean, just one thing over the last handful of years, I feel like things can stay the way they are longer than people expect. So who knows if we’re overdue for a correction or anything like that.
But there’s definitely reasons for why these areas of the market are moving the way that they are. What’s the old saying? Just because something’s overbought doesn’t mean that it has to change. It can remain overbought for a long time.
Right, yeah. So just because things have been really good doesn’t necessarily mean that they’re going to go in the other direction. I think that’s the momentum of markets; it can continue for a while in the face of what everyone else thinks. So just another milestone to touch on.
And not to be a wet blanket, but things can go down and stay down a lot longer than people expect too.
We haven’t seen that in a while.
Absolutely, it works both ways.
So, like I said, another milestone here just to touch on: S&P 500 hits 6,000 for the first time, just yesterday on the 11th of November, and it hit 5,000 for the first time earlier this year. And that’s the shortest time it’s taken to move a thousand points in the history of the S&P 500.
It took about seven months to do that and to make that jump.
Now to be fair, the difference between 4,000 and 5,000 is 25 percent.
But the difference between 5,000 and 6,000 is 20 percent.
Somebody was out yesterday saying that the S&P could go to 10,000, but he didn’t say when.
But to go from 6,000 to 7,000 is only going to be 16 plus percent. That’s a good year.
Yeah, it gets easier and easier to hit these milestones.
So like I said in the beginning, it was a busy week. There was a lot of build-up to the election and the Fed rate cut meeting. I know we have another Fed meeting here.
We’ve recently, and I mean in the last couple of years, talked to folks who went to cash in 2008.
Now for me, 2008 seems like yesterday, but the S&P 500 bottomed in 2008 – or beginning of 2009 – at 666, and now we’re at 6,000.
A long way from home.
Yeah, that’s compounding for you.
I think that speaks to what we were just talking about about the momentum of markets. We’ve been in a pretty good stretch since that bottom.
We’ve certainly had times where it’s been difficult and we’ve lost money during 2009 to today.
I mean, that’s 15 years. We’ve certainly had some tough stretches in there. But if you have stayed the course and haven’t swung to cash or done anything drastic with your investments over that course of time, then you’re probably happy with that decision looking back on it today.
Brendan makes the point all the time about essentially what you’re betting on is capitalism. And these companies here in the United States, whether it’s an election or a financial crisis like in 2008 or anything that popped up along the way, these companies, these stocks that are performing well.
When something adverse gets in their way, they’re not just going to say, “Well, throw our hands up. We can’t make money anymore. We’re going to close up shop.” That’s not how it works. People are going to adapt. They’re going to continue making money.
So really, just keeping your money invested there is just betting on the capitalist system and, you know, the American Dream, so to speak. When you think about it that way, I think it makes more sense to remain invested for the long term.
Yeah, and the volatility that you have to endure during those time periods is the price that you pay for the long-term returns that we bank on when we’re making retirement and other financial plans for people. Can’t have one without the other, unfortunately. Wish it weren’t the case, but it is.
Just wrapping up here, you know, like I said, we’ve got another Fed rate cut meeting here at the end of December. But as we wrap up 2024 here, it was a busy week. We’ll see if things settle down or not. We’re not saying things are going to break one way or the other, but just kind of wanted to recap here and share our thoughts about the busy week that was surrounding the US presidential election.
First time ever Jay Powell gave me a quarter-point fed rate cut on my birthday. Thanks, Jay.
There you go. Happy birthday to you.
We didn’t even mention that yields like the ten-year have gone higher since the Fed started cutting.
We could do an entire podcast on that. Yeah, that one line. But we’ll move on.
I was going to say, by the time we publish it, if it’s two or three weeks from now, that might not even be true anymore. Yeah, so yeah.
Well, I did one that was like, “Should you invest your cash because rates are falling?” and that was literally the bottom in rates when I released that. And now it’s like, they’re just up.
