This faith and finance podcast is underwritten in part by Soundmind Investing. For more than 30 years, do-it-yourself investors have relied on SMI for proven strategies and trustworthy guidance. SMI helps people build wealth so they can provide for their families, prepare for the future, and give generously. Learn more at soundmindinvesting.org I'm Rob West. The Fed is finally cutting interest rates for the first time in four years. What does it mean for investors?
You might be surprised. Mark Biller is here with the details and then it's on to your calls at 800-525-7000. That's 800-525-7000. This is faith and finance, biblical wisdom for your financial decisions. Well, our guest Mark Biller is the executive editor at Soundmind Investing and underwriter of this program. Mark sometimes shows up to tell us that what we think we may know may not necessarily be true. Mark, welcome back. Thanks, Rob.
Good to be with you. In mid-September, the Federal Reserve cut the Fed funds rate by a half a percent, which was seen as an aggressive amount for a first cut. You wrote an article, Mark, that points out that what investors broadly believe about rate cuts may not always be right. Tell us about that.
Yeah, sure, Rob. So let's start with a popular phrase that a lot of your listeners have likely heard before, and that is don't fight the Fed. So over the past few decades, this has really become really the guiding principle for a lot of investors.
And the idea behind it is simple enough. When the Federal Reserve is raising interest rates, that slows the economy and investors should be bearish or cautious about stocks. On the other hand, when the Fed is cutting rates, lowering interest rates, that tends to stimulate the economy. And as a result, investors should be bullish or optimistic on stocks. Now, over the last 15 years, faith in this idea that Fed policy is really a key driver of markets has grown tremendously. And that's because we've seen the Fed intervene in markets fairly regularly. And more often than not, those who didn't fight the Fed found themselves on the right side of this perpetually rising market. Yeah. So investors have learned to be bullish when the Fed cuts rates, right?
Yeah, that's exactly right. And it's been a great strategy, at least in recent years, but it hasn't always worked. And that's the tricky thing that we were highlighting in this article that we're discussing today. So in 2001, and then again in 2007, the Fed started significant rate cutting cycles right into the teeth of bear market recessions. And in both of those cases, in spite of all these rate cuts, stock investors had 50% or so losses in both of those cases. So those were big, fairly recent examples where these rate cuts really didn't help investors at all. So today, with most of the US economic data slowing over the past several months, some investors are looking at those 2001 and 2007 examples, and are wondering if the same thing could happen again today. Yeah, meaning we can't assume that rate cuts will keep the bulls running on Wall Street. Tell us about the historical evidence you wrote about in your article, Mark.
Yeah, sure. So this is a case where looking really closely at the historical record is important because the average experience after the first rate cut of a cycle really doesn't tell us very much. What the data shows is there are two distinct paths that the market tends to take when the Fed starts a new rate cutting cycle.
One path is the recession path, the other is the non-recession path. When the economy is heading toward or is already in a recession, rate cuts don't tend to help the stock market. Since 1980, we've had three of those recessionary rate cutting cycles, and in the 12 months after the first rate cut, the S&P 500 was down 16%, 28%, and 24%. So those rate cuts really didn't spare investors from big losses. On the other hand, when the economy doesn't go into recession, rate cuts have provided that boost, that tailwind that investors expect, and we've got three examples of those since 1980 as well. And in those cases, the S&P gained 24%, 14%, and 22% in the following year. Well, really interesting, Mark.
I know we're going to continue to unpack this. So where does that leave us? Are we on a path for recession? Why did the Fed cut so much larger than many expected? And what does that mean for your portfolio in the future? Mark Biller here today, Mark is executive editor at Sound Mind Investing. We're talking Fed rate cuts in your portfolio.
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I'm Rob West. With me today, Mark Biller, executive editor at Sound Mind Investing. You can read the article we're discussing today called The Fed is Cutting Interest Rates.
What does it mean for investors at soundmindinvesting.org? And that's our topic today. What are the implications for these Fed rate cuts, the one we've already experienced, and of course, more to come. And Mark, you were sharing before the break that it's pretty clear recession is the big variable. All six of the past recessions from a long rate hiking cycle to a significant rate cutting cycle saw big market moves, either up or down. The key was whether or not a recession followed or not. So where does that leave us? And in your view, do you think we're on the recession path right now?
Yeah, that's the million dollar question, right? You can see why investors and economists spend so much time trying to figure this out when you see the implications in the historical record. What I've been telling SMI members is this, Rob, it's clear that economic growth has been slowing in recent months.
But that's a different story from the economy actually being slow. So this is the third year in a row that expectations of a recession have grown as we've approached the end of the year. It happened in late 2022.
Again, late last year in 23. And in both of those cases, the anticipated recession failed to materialize. I think a big part of that is that investors have been interpreting slowing economic data as if we're in a normal economic cycle instead of realizing that the slowing data could be just a normalization after the huge post COVID economic spike that we had. So slowing back to normal isn't the same thing as slowing into a recession, but in real time it can look like the same thing. So we've been preparing SMI members for a possible repeat of the past two years when recession fears eventually gave way to a realization the economy is actually still in pretty decent shape. Or at least if there is going to be a recession ahead, it probably won't show up until sometime next year, which means that investors have a pretty strong setup for further gains between now and January.
Yeah, that's really interesting. Now, Mark, what do you think is really going on over at the Fed to explain why they started this cutting cycle with a larger than expected half percent cut? Yeah, great question. Well, I'd say first of all, this cut makes it pretty clear that the Fed has shifted its focus away from fighting inflation and towards supporting employment and the broader economy. Normally the Fed only cuts more than a quarter point if there's some sort of crisis going on.
There's clearly no crisis today, not with the economy growing at 3%, unemployment below the long term average at 4.2%, and asset prices near all time highs. Now, I should say that the Fed doing this isn't necessarily inappropriate because the Fed has a dual mandate to promote maximum employment as well as keep prices stable. So with inflation coming down as much as it has, the Fed is basically saying interest rates are higher than they need to be and there's no need to risk slowing the economy more by keeping them this high. I think it's probably fair to also point out that the Fed basically blew it when they waited so long to raise rates when inflation was raging out of control a couple of years ago. So the last thing they want to do is to appear to blow it again by keeping rates high and spurring more unemployment than they need to. There's probably also an element of the Fed figuring that by doing a bigger cut up front, they may not need to do as many cuts further down the road, which is probably accurate. But all of this to say, Rob, if there's no recession and they keep cutting fairly aggressively, it does shift the risks quite a bit. Cutting too much too soon or cutting aggressively very soon if the economy stays healthy does open the door for inflation to come back probably sometime next year. Yeah. And that's probably why we saw the Fed come out quickly and say, don't expect these larger half percent rate cuts moving forward. Expect something smaller. But Mark, back to the question about recession, it sounds like you're leaning toward the non-recession path. Is that fair to say?
Yeah. At this point, the non-recession path seems more probable at least between now and the end of the year. And I've been writing quite a bit about this for our members, not because I want to make some dramatic call about interest rates or recession, but there's a lot of fear right now about the upcoming election. And I've seen investors in the past get scared and sell around past elections.
I don't want our members or your listeners to do that because I think there's actually a reasonably optimistic setup for markets between now and the end of the year. So, you know, kind of circling back to the beginning of our conversation, the data just doesn't really support that recession case at this point. We've got economic growth, inflation, asset prices, corporate profits, household net worth, and a number of other key indicators that are all registering considerable strength. And on top of all that, the government is still running 7% of GDP deficits, which is terrible policy in the long run, but it's a huge boost to the economy in the short run. So the bottom line is if the economy avoids a recession and keeps growing while the Fed is aggressively lowering interest rates, you've got the recipe for a potential Goldilocks scenario where asset prices just keep grinding higher. And what do you think is the likelihood, Mark, that as the Fed cuts, we will see inflation start to tick back up?
I think that that's quite likely if we avoid a recession, but I think there will probably be enough of a lag before that really shows up in the inflation data that they probably will continue to cut based on lower inflation numbers until that really can percolate through the economy and starts to show up next year. Yeah, that makes sense. All right, Mark, tie a bow on this for us. What's the take-home message for our listeners? Yeah, well, the take-home message is simply stay data dependent. You know, the Fed likes to say that it's data dependent.
That's kind of debatable, but it is a worthy goal. And it's one that we practice at SMI by adhering to trend following and momentum driven strategies that change as the data changes. Now, at this point, there's not a lot of evidence to indicate the economy is at serious risk of slipping into recession. Now, that doesn't mean that it won't. It just means the data isn't yet showing that we're on that path. And if the data changes, then, of course, you have to change your view and we'll do that as well.
But at this point, we think the economy is going to stay resilient at least a little while longer, despite all of the imminent recession calls you're hearing around today. And Mark, folks can access your thinking on this and your upgrading strategy and a host of others by being a member at soundmindinvesting.org. Is that right?
That's exactly right, Rob. All right, folks, you can check it out today. The article we've been discussing is the Fed is cutting interest rates.
What does it mean for investors? You can learn a whole lot more when you visit soundmindinvesting.org. Mark, thanks for stopping by. Always my pleasure. Folks, your calls are next. That number, 800-525-7000.
We'll be right back. And interact with the community of like minded believers where you can ask questions, get answers and share what you're learning. Go to faith five dot com and click the word app to get started. Paying too much for health insurance, frustrated by high deductibles and increasing premiums? There is a better way. Christian Health Care Ministries, CHM is a Christian community delivering a faith based solution to the high costs of health care. Take control over your health care costs with a program from CHM that could save you up to 40 percent. Learn more and enroll today at CH Ministries dot org slash faith five. That's CH Ministries dot org slash faith five. Great to have you with us today on faith and finance here in our final segment. Let's turn the corner. If you have questions on anything financial, we'd love to tackle those with you.
That number to call 800-525-7000. We've got lines open and let's open up the subject matter here to whatever is on your mind in your financial life today. You know, as we think about applying God's wisdom to our financial decisions and choices, here's what we recognize. Ultimately, it starts with our hearts. Remember Jesus said where your treasure is, there your heart will be also. So we know that our heart follows our money into wherever we're going to allocate God's money, which just means that, well, if we're investing in ourselves, our hearts going to follow our money there.
Now, that's not a bad thing. Part of God's good creation of money is for our enjoyment, but it's also to give generously. And I think it's to invest responsibly and knowing that our hearts going to follow our money, I think just should cause us to think differently about how we care for and steward what God has entrusted to us. It also requires that we take a look at where we're spending God's money and make sure that it does truly align with what's most important to us.
Right? My spending, my printout, if you will, used to say are my check register, but I guess very few people use a check register anymore. I'm sure there's some out there saying, wait a minute, I still use a check register. But let's say your check register or your printout of your financial account, it tells a story about what's most important to you. And here's my experience is that for most folks, that story perhaps doesn't always line up with what's truly most important to them.
They might look at that and say, well, this is telling a story that's different than really what's on my heart. Because what's on my heart is being able to bless and serve my family. What's on my heart is being able to be engaged in culture transformation. What's on my heart is gospel work to the ends of the earth.
What's on my heart is that person with a need right down the street. And perhaps we need to make some changes in our financial life. Perhaps a financial finish line is in order to say, wait a minute, I'm not just going to continue to increase my lifestyle just because I've gotten a raise or I've gotten a series of raises or a bonus. Because remember, our level of spending will always rise to our level of income unless we protest to the contrary. And so I think we need to put ourselves in a position where just because we see something more income available doesn't mean we need to have a corresponding increase in lifestyle spending.
But that means we've got to be intentional because that doesn't happen automatically. Our default, if you will, is to put ourselves in a position where as more money is available, we just find more ways for that to end up in things that we enjoy or perhaps we've been wanting to do. And again, nothing wrong with that, but maybe it's time to say, no, I'm going to cap my lifestyle at X amount and anything the Lord provides beyond that, I'm going to give to his kingdom.
So maybe those are some things to think about just as you think about your role as a steward in managing God's money. We're going to go to Ohio and welcome Lee to the broadcast. Go ahead. Hey, Rob, really enjoy your show.
I've been listening ever since Larry Burkett was the host back in the day. My question is, I have about $80,000 invested in CDs with Marcus Goldman Sachs. Because I'm single, I decided to put my sister in as a joint owner in case I should pass away. My sister and her husband are concerned that if I were to get sued for some reason, such as an auto accident or whatever, that not only could they get the money from my invested CDs, but they could also go after my sister's investments because her name is listed as a co-owner of my investments. I've looked into taking her off as co-owner and putting her as a beneficiary like she is on my other investments, but the only way to do that is to close the CDs and then reopen them.
And if I do that before they mature next March, I will lose a lot of the interest, which would be about $2,000. So do we need to be concerned that she can be liable if someone came after my portfolio? Yeah. I mean, is there anything kind of pending here legally? Is this all just hypothetical and being well planned? It's all hypothetical.
Yeah. I mean, it's something to consider. I'm not an attorney, and so I would always, for legal matters, just in terms of whether somebody could attach holdings and what your exposure is, I would always direct you back to an attorney.
I think if it were me, Lee, I'd probably let this ride just given that the chance that something's going to happen is very small and not give up those couple of thousand dollars and then maybe the next go around, whether it's another CD or some other type of investment, you just transition it to ownership in your name only with her being the beneficiary. Because anything else would involve retitling it. I mean, you could put an LLC in place that could, you know, hold the assets and, you know, try to protect from creditors, something like that. I just don't think it's worth the hassle here on something like this. But again, if you, you know, I don't want to minimize your desire to make sure everybody's protected and none of us know what could happen at any point. So I'm not saying, you know, we should just throw caution to the wind. But I would say if you are, you know, really concerned about it, and it would create a real, you know, problem, if something were to happen for either of you, then you could talk to an attorney about it.
I think for me, I would say this is a very low risk, we're accepting some level of risk, knowing that, yes, there is a scenario where this could happen, and it could be attached, but we realize it's pretty small. And so we're going to let this ride out to the end of the, you know, the period and then next time around, we're going to solve for it differently. Okay, that sounds like good advice. All right. I appreciate it. Lee, it's a good question.
And so I don't I don't minimize that at all. What they're saying has merit. I think it's just a matter of, you know, it's there's a cost benefit analysis we have to do here. And is it worth giving up two or $3,000 for the very remote chance that with nothing on the horizon, there's just out of left field a lawsuit that gets all the way to the point of attaching shared assets and taking claim to it is very small. So maybe the other thing you could do would be to get an umbrella policy for, you know, a small amount of money for, you know, two $3 million that, you know, could be another way to offset risk. So before any assets are attached, beyond the limits of existing policies, like homeowners and automobile, the you know, any kind of lawsuit could be covered through that umbrella policy, they're fairly inexpensive. To get, you know, so for you to add a couple of million dollar umbrella policy until the end of the period, I don't think is a bad idea for you to have anyway.
And that's probably something you want to hang on to. So that would be another way to go about this to say, Listen, I put another layer of protection in here to cover any kind of suit that goes beyond the limits of my existing policies. And so you know, that's something that is going to be helpful to me regardless of the situation, but would also kind of shield you as well.
Because hopefully, you know, we would exhaust those assets or the coverage of that umbrella policy before we get anywhere close to other assets that you hold. Hopefully that's helpful. Lee, thanks for your call today. We appreciate it. Folks, such a privilege to come alongside you each day to encourage you to hear your stories. We count it a privilege that you invite us into your journey as a steward of God's resources. Our goal is to be hopeful, to be encouraging, to be reverent as we deal with and approach God's Word, but always to point you back to Jesus.
Here's my experience. When we get this area of our lives right, our finances, it has a ripple effect through every other area of our lives and ultimately will lead to a more intimate relationship with the Lord. That's our goal. Big thanks to my team today, Taylor, Devin, and Pat, and we'll see you next time right here on Faith and Finance.
