The Debate Comes to an End
Dear subscriber,
When you make predictions about markets, it's wise to maintain a sort of "never say never" modesty.
But today, we don't need to hem and haw... We are getting a 25-basis-point rate cut next week.
The inflation data released on Wednesday showed core inflation (which excludes volatile food and energy prices) up 0.3% month over month in August. The expectations were for a 0.2% increase.
A 0.1-percentage-point difference may not seem like much. But trust us, it ended all debate over the Federal Reserve's potential interest-rate cut this month.
Take it to the bank... We're getting a cut.
Monthly inflation stats add up over the course of a year. The difference between a 0.2% and 0.3% monthly increase is the difference between a 2.4% and 3.6% increase in annual inflation.
Prior to the report, some thought the Fed should "go big" to shore up the labor market, which looked to be weakening (as I noted last week). That reasoning would support a 50-basis-point cut.
But the Fed would need an "all clear" on inflation to make such a move. And it didn't get that.
This means that we're all but certain to see a 25-basis-point rate cut at the Fed's meeting next week, taking the federal-funds rate from about 5.5% to 5.25%...
The way to grow your wealth as an investor is to focus on buying the stocks of quality businesses... not by focusing on macroeconomics.
But as I covered a few weeks ago, interest rates are central to asset prices – you can't ignore them.
I look forward to when we can ignore the macro in favor of the micro, but I've been saying that for four years now.
So, why does the coming rate cut matter so much?
To put it plainly, it will affect your life. The cost of your mortgage and car loan... the value of your home and retirement portfolio... it will all change.
They won't all drop next week alongside the Fed's rate cut. But the interest rates on 10-year bonds, credit cards, and everything else are built off of the federal-funds rate.
If you're considering buying bonds, investing in your 401(k), or applying for a mortgage, the path of interest rates matters. The question now is how far and how fast interest rates will decline over the next year or so...
That depends on the health of the economy and the rate of inflation, but you can get some insights if you know where to look.
The central bank publishes the Fed governors' interest-rate forecasts in a "dot plot," as shown in the image below.
Most of them see the federal-funds rate at around 4% in 2025. But that's from their June projections, before economic data softened... so that estimate is likely even lower today.
According to the interest-rate futures market, the most likely level for September 2025 is 2.75% to 3%.
Now, I have a graduate degree in applied economics. So let me apply some economics here...
You can use the "Taylor Rule" to get an idea of where interest rates should be. The Taylor Rule is a theoretical model that uses the Fed's goals for inflation and employment to arrive at the "correct" interest rate, rather than leave it up to policymaker decisions.
The Fed doesn't use the Taylor Rule, but it's a way to get an objective opinion on rates.
Using modern estimates for things like the neutral real interest rate and the non-accelerating inflation rate of employment, the federal-funds rate should be about 3.6% today.
All that is to say, the Fed should've raised rates faster... and rates have been way too high since late 2023. I'd have to think that matches with what we know in hindsight...
Surprises happen. But rates are headed down. My best guess is that the federal-funds rate will drop to about 3.5% by September 2025.
That means we'll see something like 5% on a mortgage and that the average price-to-earnings ratio on the S&P 500 Index could be 20% higher than it is today.
I'm putting a handful of assumptions into those figures, but there are simple models behind them.
We can walk through them someday. But for now, I just want to help you understand what interest rates – and the Fed's decision next week – mean to you.
The challenges facing today's market are clear... The economy is slowing and looking a bit bearish. But the Fed's explicit goal is to make people bullish.
It wants to make folks bullish on the economy, not the stock market directly... though the effect is the same.
Will stocks rise? Well... that depends on whether a recession or falling rates have more power. And that battle starts next week.
What Our Experts Are Reading and Sharing...
Whatever your politics, Kamala Harris won the other debate. The good thing about a debate is that, despite spin from both sides, common knowledge rules. The winner is whoever people declare the winner. According to ABC, early surveys from CNN, YouGov, and Red Eagle Politics all show large margins for Harris. We'll see if it translates to the polls.
Candidates' promises always have one thing in common... They cost money. Neither candidate (nor party) seems ready to address the biggest problem facing our nation... the U.S. federal deficit. Our own Corey McLaughlin walks through it in the Stansberry Digest.
Cliff Asness is a quant-investing genius and the billionaire co-founder of AQR Capital Management. He just published a great paper on why he believes the market is getting less efficient over time... and why value-based stock picking will thrive. His piece is a bit technical, but it offers key lessons for investors.
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You'll probably learn more than you ever wanted to know about pricing trends in a fairly dull business... But this is precisely how you can gain an edge in the markets over 99% of investors.
As a Stansberry Investor Suite subscriber, you can read the entire report here.
If you don't already subscribe to The Stansberry Investor Suite – and want to learn more about our new special package of research – click here.
Until next week,
Matt Weinschenk
Director of Research
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