Do Rate Cuts ACTUALLY Send Stocks Higher?

00:00 - Introduction
02:41 - Basics of Rate Cuts
06:05 - Experiment Details
07:37 - Return Results
10:06 - Result Explanation
13:13 - Takeaways

In today's video, I go over the history of rate cut campaigns in the US to try and figure out how markets have historically reacted to interest rates falling.

DISCLAIMER:
This channel is for education purposes only and does not constitute financial advice - Richard is not responsible for investment actions taken by viewers. Please seek out a registered advisor if you require assistance (while Richard is a registered portfolio manager at WDS Investment Management, he does not provide advice through The Plain Bagel, which is not affiliated with his employer).

[JohnDoe-ylwn]

Richard over here spending 15 minutes explaining that everything is priced in.

[TheEmolano]

Most things that makes stocks go higher works this way: people believe the thing will make the stock go higher so they make the stock go higher by buying it. That's until the next quarter report when people decides to follow the profit instead

[Tie]

It's not about the rate cuts, it's about the narrative. Rate cuts on a dismal economic backdrop are bearish, not bullish.

[why_though]

The most dangerous assumption is that you can extract meaningful conclusions from 8 data points with variance this high.

[robertpdot]

Those stock/bond certificates were a great throwback to your older animated content - with the sound effect to boot! Pleasant additions to a wonderful video, thank you Mr. Bagel.

[dschaef]

Wait a second... I'm pretty sure the multiple R correlation on the regression is bounded between 0 and 1, not -1 and 1, so it is never negative. The model coefficient on the effective fed rate is negative, so the relationship between the effective fed rate and the S&P 500 is in the expected (negative) direction.

[mikele]

As a coworker in Finance, Excel spreadsheet is the tried and true method. Good job man. Good job!

[augustus]

It actually lowers my returns instantly due to currency volatility decreasing the value of my dollar-denominated positions as compared to the euros I use in my life.

[Tomasz]

I loved the Batman style screen jump to the Excel sheet!!!!

[TQFMTradingStrategies]

It’s about equity risk premium. When corporate earnings are too close to inflation you don’t have a ton of room to cut.
If you run the place correctly increasing rates takes out the trash and improves overall earnings ratios, giving you room to cut later.
But we never did that. We weren’t strict enough and non-profitable vapor ware and overcapitalized fueled speculation still dominates the economy.
If you do the math all of the returns in equities since the pandemic have been about the decline in the value of the dollar not in the earnings or production of the enterprise increasing.
Basically a lot of poorly run enterprises still need to be eliminated to properly prune the tree so it can be beautifully grown using additional money supply.
Till then it’ll cost you 2% inflation to print your way to 1% real growth. Which has been the issue since 2018 or so. We are not able to effectively deploy all the capital at the speed it is being created.

[akshayjain]

I think the context in which rate cut happens makes a big difference, like after a crisis if rate cut happens, it is saving measure for the economy whereas after periods of high inflation, rates cuts will be perceived differently

[jimbojimbo]

I remmeber a PM doing a presentation for us, simply put the discount rate goes down so according to any valuation model the Valuation should by default go up if interest rates are used as cost of capital

[TheGaijinZack]

In your experiment, I was reminded of PB's Chart Crimes video. If you just looked at the data that you crunched at first glance, the returns average to the market. But you spend the next 3 -5 minutes explaining the flaws in the approach like the lack of data points makes it hard to draw conclusions with any degree of accuracy for forecasting. As a bagel channel that manages degenerate retail investor's expectations, I appreciate you're approach to market education.

[SamLunser]

You're honestly my favorite finance youtuber. You explain stuff very simple so people like me can understand 😂

[cryptoricardo]

I was just about to comment about the why a rate cut is made matters and then you bring it up! Superb. Indeed, a small cut can be good, but a series of aggressive cut can mean panic, that something is seriously broken

[jakob]

I don't really like that the Excel starts on the day of the rate cut announcement. In all likelihood, stock markets begin to price in rate cuts way earlier since they anticipate the announcement. The FED has a history of giving the people what they expect (of course, the expectations are formed by the FED via speeches, protocols, and previous actions, so it's not one-sided). So I would rather start to look at stock movements beginning at maybe 1-6 months before announcement of rate cuts.

[EdwardHeavrin]

Your YouTube channel is the best. No fud no hype.

[bender]

Been needing more Plain Bagel. It's a Friday miracle! :)

[AlanPage-em]

Would love to hear your view on the economist Richard Werner and his position on interest rates and money creation. Thanks!

[siddharthbirdi]

Very opportune and needed episode, thanks man