The Federal Reserve has cut interest rates for the first time since COVID rocked the world.
Interest rates influence stock market valuations. Warren Buffett compares them to gravity: “Interest rates are to the value of assets what gravity is to matter.”
So lower interest rates = higher stock prices?
It depends… on the strength of America’s economy.
When the Fed cuts rates because we’re headed into a recession, things get messy. It’s happened a dozen times since 1970, and stock market performance in the next year has historically been all over the map.
Outcomes range from down 36% to up 34% for the S&P 500. Messy!
Stocks perform much better after rate cuts when the economy keeps humming.
My take: Don’t try to make money trading stocks based on big “macro” events. Instead, invest in great businesses that’ll thrive regardless of what the Fed does.
Will companies buy fewer AI chips from Nvidia? No. Will Tesla shelve its robotaxi rollout based on what Jerome Powell says? Not a chance.
Invest in great disruptors profiting from megatrends, and the rest will take care of itself.