Do Rate Cuts ACTUALLY Send Stocks Higher?

[@ThePlainBagel]

Happy Friday! To try everything Brilliant (today's sponsor) has to offer for free for a full 30 days, visit brilliant.org/theplainbagel or click on the link in the description. You’ll also get 20% off an annual premium subscription.

[@primary4075]

how are you so fast, powell still speaking

[@phantomcreamer]

You should really add the standard error of the mean to the average annualized return because the variation is HUGE!

[@henrythegreatamerican8136]

Yes, they do send stocks higher. But the catch is most of the "big boys" are generally a few steps ahead of the FED. This means most of the moves from the interest rate cuts are already priced in before the FED officially does it. If you look at the stock market moves a few months ahead of the actual cut, you can see stocks moving higher.

[@la.zanmal.]

@@henrythegreatamerican8136 It's not as if this is insider information. The bond market can be analyzed to infer whether and how much the market is predicting the target short-term interest rate will change. Some financial publications will even tell you about this result.

[@kristenxmarie00]

@Infurnaevely1

[@JohnDoe-yl3wn]

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

[@tomas_marques]

On one hand that is unquestionably true. On the other, stock like Tesla go up 50%, down 50% and up 50% again in a span of one year. It may just be that the algorithms have priced in human stupidity, and at this point are just basically farming it at scale. Interesting times.

[@bobbytheduck8236]

So basically, semi-strong market theory on rate cut announcement but there can be a sudden shock if Fed decrease the interest rate by 50 basis point. Very unlikely though.

[@kage-fm]

markets: because emergent price discovery active investing: because tiktokers have mysterious knowledge that the market lacks, even though they are also broadcasting that information on social media

[@jacobfillups]

😂

[@CitsVariants]

Should be 5min max

[@Moz122333]

TO THE SPREADSHEETS!

[@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

[@xiphoid2011]

Or more demand in the stock market. If all the Americans save and invest >20% income like Asian Americans do, the flood of money into the stocks and bonds would drive up the prices alot.

[@mmmom6469]

Bull forever

[@clray123]

Harassing short sellers using tax law can certainly make stocks go higher. (Aka produce inflation.)

[@CatGamer-wc2ij]

@@xiphoid2011 It has. Also the asian markets lag behind the less-saving American markets...

[@sirloin8745]

So Pension Funds & Banks *anticipate* these things in advance of the event? Why did no-one tell the rest of us that you can do that!

[@mikele7982]

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

[@robertpdot533]

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.

[@dschaef91]

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.

[@ThePlainBagel]

That's correct, an error on my part with interpreting the stat - updating the video now to remove the error.

[@dschaef91]

@@ThePlainBagel Thanks for the reply! For those viewers who don't spend their working days interpreting regression results, the larger point in the video is still valid. Notice that the R-Squared statistic indicates that only roughly 20% in the variation in the S&P 500 is explained by the fed rate. Richard is quite right that the substantially larger proportion of the variation (80%) is likely explained by other macro-economic forces.

[@carterwgtx]

Nerdy answer - the R value is bounded between -1 and 1 and indicates the quality of the correlation and whether it’s a positive or negative correlation. The often more reported R squared value is purely a measure of the quality of the correlation (better so than the R value alone) and is bound between 0 and 1.

[@augustusg857]

​@@carterwgtx precisely, good sir!

[@dschaef91]

@@carterwgtx The "R-value" (Pearson's rho) ranges from -1 to 1, but that's not what we're talking about here. The multiple R value from a regression (technically, the coefficient of multiple correlation) takes on values between 0 and 1 and only indicates the degree of joint correlation, not the direction. Edit: Conflating the multiple correlation with the standard correlation is the same mistake now fixed in the video. This is a very easy mistake to make.

[@why_though]

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

[@AbdulHamid-mx6ks]

more of a fun exercise if anything

[@why_though]

@@AbdulHamid-mx6ks I'm sure Richard knows this, but all the internet sources he mentioned I am sure do not.

[@cisium1184]

Define "meaningful conclusions" in this context. This is not a model; Richard is not predicting how this market will respond. He's illustrating different ways markets _can_ respond.

[@mrclk6695]

yeah this bullshit

[@tHebUm18]

Almost like that was his entire point and to ignore all the clickbaity YT vids by people claiming they do have a meaningful conclusion from it.

[@augustus331]

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.

[@Tie509]

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

[@arbgarlson5299]

Stocks pumping 😂

[@u2fkeys665]

​@@arbgarlson5299for now😂

[@DarkoFitCoach]

Whats so dismal about economy? And try not to say total debt

[@Lolatyou332]

​@@DarkoFitCoach We've just had massive inflation, inflation is still about 2%, we have mass immigration, low housing supply, high food prices, high energy costs, etc. If the 1970s haven't shown you yet, excessive inflation is the worse possible outcome in an economy because it causes both a decrease in consumer spending as well as depreciation of investment assets, even if the price stays the same. If prices of everything increased 10%, but businesses only report a gain of 5%, they've effectively become almost 5% less profitable.

[@DarkoFitCoach]

@@Lolatyou332 100% agreed on that. And its all leftists fault. Curse their graves!

[@Tomasz30899]

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

[@jimbojimbo6873]

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

[@lesdickson9765]

I agree with most of what you’ve said except that last part. The cost of capital (WACC) ≠ interest rate. The Fed funds rate is used as part of the WACC calculation. An increase or decrease in the federal funds rate affects a company's WACC because the risk-free rate is an essential factor in calculating the cost of capital. The interest rate paid by the firm equals the risk-free rate plus the default premium for the firm.

[@akshayjain6290]

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

[@SamLunser]

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

[@pomp4401]

His old Bitcoin videos aged like milk though lmfao!!!!

[@IntuitivelyCurious]

​@@pomp4401 how's that?

[@bubbasanches4591]

​@pomp4401 youre uneducated. I doubt you even know that transactions stop when mining stops, thus btc is not money or currency. Lmao at you. Keep buying into a pyramid scheme though, you might be able to trick other fools.

[@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

[@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.

[@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.

[@infestorcraft2]

Before watching the video, my best guess is that markets would probably drop during periods post rate-cuts because the rate cuts themselves would generally be done to stimulate an economy in a not great state - that combined with the fact that the rate cuts even in theory should have a have a bit of a time-lag before their effects can be felt.

[@jakob6628]

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.

[@juriteller3688]

Since you can empirically prove that companies tend to use cheap credits to buy back shares lower interest rates can have a rather big effect on returns.

[@AlanPage-e7m]

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

[@ilekomplikacji]

so it's like regression to the mean after a praise/criticism; paradox of seeing better results after a criticism and worse after a praise (only because these actions came at specific low/high points of the average outcome) so basically you do a rate cut at a low to get back to the average, whilst in the selected timeframe it looks like stonks

[@GeorgiaGardner-r7l]

Yes, everything is clear, professionally competent, accessible! Well done!! Thank you!!! Respect

[@ominollo]

Thanks Richard. Opportunity cost: two powerful words when it comes to capital allocation 🙂

[@EdwardHeavrin]

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

[@siddharthbirdi]

Very opportune and needed episode, thanks man

[@bender9000]

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

[@frozenflames5263]

Whether it’s TikTok Finfluencers or hedge fund aficionados, Richard is always able to explain how there is no magic bullet to finances and it’s more complicated than most of us want to believe. p.s. Loved the Excel breakdown. Would be interesting to see more of your Excel witchcraft

[@LouisHache-rp5ec]

Merci!

[@this_is_japes7409]

1:03 stimulating for the economy in the very short term, really need to add that qualifier.

[@h-montero9206]

Great video. Once rate cuts are announced, they temporarily go up higher. But the cuts are already priced in, in result “lost their luster” BECAUSE although rates are getting cut. They’re not getting cut in a faster pace. Therefore, Sinking the economy as rates go lower

[@aaron159r2]

You should apply standard error margins to your historical data to see if there is even a statistically significant correlation. The was a lot of variation in you small data set. It may just be that the average is too random to be significant.

[@toddanderson6568]

A couple of technical points. First, it might be useful in your notes to refer to the data set you were using. Second, you explain why you use the dates that you do, and I think it was appropriate for the question that you were trying to answer. However, given where we are at today, I have found the data from the 1970's to be enormously useful. Thus, I usually start my analysis with 1970 data. Otherwise, really like the work that you are doing and growing up in MIchigan, I always try to support my neighbors.

[@JZ1917]

This content is superb. Educative, with data to illustrate the thesis that things are unpredictable after all, explained in simple terms and shortly. With some hilarious transitions. Thank you for creating this.

[@BennettOrtega]

Your consultation and encouragement have made a huge difference for me. I'm so grateful!

[@donnab0518]

"Before hopping into the dark secrets held within my sheets" gave me an actual laugh. Thanks so much for that!

[@matthewheath7839]

Its good stuff

[@cataphracts123]

More dollars is more investment short term. The hard part is knowing if the correction works because it doesn't inherently force positive growth #, and a correction doesn't always result in negative growth numbers. Ideally this is how countercyclical fiscal policy works in theory. You want lower highs and higher lows, smoothing out the economy and as boring of a stock market as possible. I think the stock market lags a bit with actual growth in the economy. The effect isn't instantaneous. The announcement is sometimes a small drop of water into the bigger bucket of inputs for the daily price. One can't know what the alternate timeline is of what the prices would be if the opposite policy were enacted.

[@Hrafnskald]

12:25 is a great point, and I would suggest that perhaps what rate cuts do is slow the decline in markets more than leading to a massive surge. Absent a rate (or when the market thinks there will be one but there isn't-see the last 60 days), the decline might have been worse.

[@harmelgill627]

Excellent information coupled with simplicity. 👏👏👏

[@chooshchoosh]

Though one doesn't know for sure, the 30 to 120 day period before the rate cuts start will see the market's anticipation of the cut. It would be helpful to see a spreadsheet start date around 90 days prior to your current one.

[@guilhermezincone7509]

I love how I watch every Richard´s video knowing that in the end all that matters is investing in the long term, and still i´m excited to watch the next video haha

[@leonardosanchez-r1l]

i watched i thousend of videos but your videos are the best ones you explain everthink continue boss

[@AnthonyFarmer-fs7tb]

wow, I've been waiting for a new video for a long time. it's finally out🍒

[@ThunderrrStormm]

Excellent video on a really interesting topic! I really enjoyed seeing ALL the numbers shown in a table format. Media and journalists these days are so quick to jump on a single arbitrary number and craft a narrative around that. It’s refreshing to see the entire dataset. Informative analysis and explanations as usual too. Thank you Richard! If it’s not too much to ask, I’ve got a suggestion for your next video: Japan’s carry trade. What it is, how it works, and how Japan’s recent increase to their interest rate will impact the JPN/US carry trade / stock market / economy accordingly.

[@PugnaxLupus]

That Batman transition killed me 😂

[@darrendent8288]

29:26 I think one aspect with this data, is that this is more related to times in which there was likely a recession that caused slowdowns in the American economy in which this is the reason why returns were lower.

[@liquidphoniclofi9615]

This research is great! More of these types of videos please!

[@VitaliySuvorov-f2l]

Thank you for another lovely tutorial with great moments. You're an angel helping hundreds make money and better there lives.

[@MrRanger316]

Richard, thabk you for the amazing video. So many fun little editing nuggets here. TO THE BOATMO... SPREADSHEETS!

[@Josh-ks7co]

The market 100% tries to factor in rate cuts so you'd need to somehow try to see when the market expected a rate cut and plot from there which would be hard. On the advice to stick to long-term, while I agree, asterisk I wouldn't put in money while the market is obviously inflated and in a bubble. I also feel tax rates are going to have to eventually rise so might be worth pulling out your gains in a bubble with historically low tax rates but that's up to individual factors.

[@timrobertson8436]

It is the expectation of lower rates that cause stocks to rise before the announcement as we see they have already been rising before the one expected in Sept. So essentially it is already baked into the cake, but lowering rates also have the effect of preventing drops in stock prices in the future and preventing a hard landing/recession. all else being equal, since many events that cause the market to drop are not predictable under control of the Fed.

[@stevenwelch1540]

Love the Bagelman (Batman) transition to the spreadsheets!

[@travelinggirl8257]

I always love your videos. It's obvious how much work you put into each one and I'm grateful :)

[@AngelicaMatthews-e8b]

your video such amazing, could you please explain more about the technic of your strategy if you have another video that explain your technic. Thanks in advance

[@lubovstrelkova5459]

What a good lesson. Thanks for helping ordinary people

[@imperatorcaesardivifillius3300]

u should find a way to put the Ampersand into the bagel so the plain is right above the bagel would look waayyy cooler otherwise good video ty for sharing.

[@AD-nr5dt]

At last! Plain Bagel time!

[@the_phobia]

The rate cut fanaticism right now is due to the bubble in real estate (especially in Canada). Rate cuts tell me the economy is doing poorly. You touch on this at around 9:30. The outcome is actually tied to the reason for the rate cut which is either because 1) the inflation rate was really high because the economy was doing well and that has been now brought under control (great), or 2) because the economy is on life support and needs to occur to try to stave off a recession. Without getting into lengthy discussions on whether recessions are necessary for a capitalism based economy to ensure efficient resource distribution, real return rate is not perfectly correlated to the interest rate (you touch on this at 11:30), and I would bet the stock market will go down over the medium term because we are likely to go into recession.

[@baharnazli8146]

Thank you d Your calculations is on next level .it's amazing

[@MichealWilson-p2d]

waiting eagerly for your training sessions!

[@MaksimKonovalov-h8e]

Your setup for this trade looks very interesting and effective. I'd love to hear more about the approach you took here.🥕

[@analienfromouterspace]

Plain and simple as always.

[@the_notorious_bas]

I wonder about the excess returns when you substract the market returns after these interventions by the average returns from the same months where no interventions took place.

[@RokKavac]

Hi i really do like ur strategy and just quick question do u set stop loss on this strategy?

[@risamaeve]

Could you do a video on impact investing for climate change? So far the best I've come up with is the GRID etf but maybe a discussion of if buying certain stocks/etfs as an individual investor actually helps those companies/sectors. I want to divest from fossil fuels but the problem I ran into was that index funds/etfs that exclude fossil fuel companies are very heavy on US tech stocks like google and meta and i'm not sure how much more ethical tech companies are than oil companies at this point. don't worry, i'm mainly in target date funds and the s&p 500, but i'd like to green my portfolio going forward and it's been difficult to find good information on the topic.

[@budstep7361]

Regarding the discount rates, don’t forget that some smart market participants may use expected real risk free rates, E(r_Tbill - r_inflation). It’s very possible that the ERRFR has been assessed as negative for this past bull run (inflation exceeding T bill rates), and as people start to see cracks in the economy the ERRFR may revert to a positive value, causing more significant discounting of cashflows as well as reduced revenue expectations and other effects that would follow a weak economy

[@yonatanalony4233]

Great analysis. Thanks for sharing. I didn't get convinced that you are a bagel, though.

Thanks for the content The link of the spreadsheet would have been nice.

[@christianhansen677]

appreciate the video, certainly gave some colour to the rate cute issue!

[@SaadonAksah]

Thanks for breaking it down.

[@Duke-225]

I'd be curious to see the valuations (maybe use trailing P/E) of the S&P500 and Russell 2000 at the beginning of each rate cutting campaign. Does it matter what valuation we're starting from?

[@BillMayler]

I always recommend your channel to my trading friends. You really know what you're talking about!

[@bryanalves4419]

Is the bond market more directly correlated? I'm curious what the numbers in this spreadsheet would look like when using bond index benchmarks rather than stock index benchmarks

[@ThePlainBagel]

Bonds have a very direct relationship to interest rates, I debated discussing it but you really wouldn’t need to dive that deep to see the negative correlation

[@extutclesurocherat]

Oliver, la forma en que enseñas es muy accesible. ¡Gracias por hacer el trading menos intimidante!

[@teerex9952]

Okay so here's what I think 1) The one-day and one-month calculations are a little too short-term to assess the impact of rate cuts on the markets. 2) The tricky thing, however, is that the one-year timeframe is a little long as, just like you said, most expansionary campaigns don't last more than a year. So before the end of the campaign (which usually coincides with the end of the expansionary year) markets have already priced in rate hikes resulting in prices scraping a significant amount off its earlier gains.

[@kerandonovan7255]

Very informative well presented and engaging🎉

[@USViper]

Historically, that's been the case, but we are in different times. 70% of my securities are bullish today, but 10% are consolidating, and 20% have dropped today...

[@rutgersadee3743]

Thank you for another great explanation video!

[@zenastronomy]

Rate Cuts do increase asset prices for several reasons 1) rate cuts leads to investors not buying bonds and instead buying stocks and real estate chasing returns 2) rate cuts leads to more hedge funds and banks buying more stocks/assets on leverage at higher prices. best example is house prices driven up by lower mortgage rates. same thing happens to stocks. 3) rate cuts leads to carry trades and companies doing similar more trades 4) rate cuts leads to money creation due to how our debt based money is created by banks being only limited by affordability, which is directly affected by the interest rates on those debts the rate cuts of 2008 and 2021 covid led to the mother of all asset stock bubbles. but even rate cuts won't fix a negative territory completely broken economy where the public have no money and stocks values are saturated for next 30 years as if rates were 0. As shown by japan. the only solution for that is a massive wealth redistribution from rich to the masses. which rich refuse to do.

[@eugenearnade8845]

people expectations /perception base on past results to actions makes stocks goes up when rate cuts happen sometimes stocks goes down because of profit taking

[@pascaltib]

Amazing informative video thanks Mr. Bagel

[@user-nu8in3ey8c]

Something to be aware of, the stock market is a prediction market, this means that some people will start buying more stocks as soon as a rate cut is suspected or announced, which means before the rate cut actually happens it begins to be "priced into" the stocks, even if on a small scale that capital will not be captured in the up swing when we look at the actual rate cut day.

[@abcdefghijk8223]

Nice timing on the video. I assume you were developing this before Powell made his announcement.

[@SusanneLoudin]

we need videos like this everyday , entertaining, educational and overall I love it good nice work🛍

[@dev4statingx90]

Exactly the video I was looking for after the Jackson Hole meeting. Thank you plain bagel.

[@diywealth]

If I had to make a bet: The short term "pop" will be more pronounced this time because of how many inexperienced speculators are in the market right now. Richard is right--there are not enough data points to make robust conclusions. But now, more than ever before, we have retail investors trading based on sentiment and story. I'm staying out of the casino. But I wouldn't be surprised if we see some serious volatility when a rate cut campaign begins.

[@brucebradburyIII]

I have literally been wondering this exact same thing recently!

[@AnastasiaTomm]

I use 2 moving averages and bulls and bears indicators. Mostly focus on bulls and bears as it helps with pattern recognition better.

[@kutayecevit4125]

Great source of information thanks

[@DataRae-AIEngineer]

Richard do you think the US cutting rates would exacerbate that USD/Yen carry trade drama, or is that completely unwound now?

[@CodingAbroad]

Good question!

[@conductingintomfoolery9163]

Would mean yen gets stronger both ways, which means inflation due to cheaper imports abroad. Japan was asking for inflation for the last 20 years and is now begging for it to stop. Japanese financial systems that use us T bills as collateral would be ok risk wise, but would probably see higher domestic interest rates to counter inflation and banks who are still willing to lend out as there collateral(us t bills) get more valuable. Pretty much Japanese banks will be lending a lot more out at a slightly higher interest rate or still. But they BOJ would want them to lend less to counter inflation Looks like higher inflation and more political turmoil, like last two prime minsters trend

[@tube.bossmc]

Very informative! Just in time😊

[@future62]

Aswath Damodaran (sp?) has a theory that the economy drives the fed funds rate vs the other way around. I think if you overlay the FFR over inflation I want to say inflation is the leading indicator.

[@mrslcom]

Stock prices are based on many factors. Rate cut is just one of many and its impact is often minor.

[@wread1982]

Thanks for explaining everything bro

[@jimanhalop4838]

GOOD EXPLANATION THANK YOU

[@KathyClysm]

But will rate cuts send my Bagle Butts to the moon tho?

[@ThePlainBagel]

100% buy now

[@michaelswami]

All your videos are must listen

[@sene8346]

At the beginning, you say that for your sponsor there is 3 day free trial, but the text says 30 days free trial. Which one is correct? (Not that I will try it 🙈🙈)

[@lidiyakulakova5608]

always look forward to new videos on your channel. Thanks for making trading so fun!

[@KonstantinZuev-cg3uy]

Thanks for your video and support. It helps me get inspired and work to improve my trading.🤭