BREAKING: The Fed Just Froze Rates — Here’s What Happens After EVERY Midterm Since 1950!
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INFLATION IS MOVING HIGHER AGAIN
Inflation climbed back to 3.7% in September, while producer prices rose even faster. Higher oil prices are adding pressure, and that is pushing Treasury yields higher at the exact moment investors were hoping borrowing costs would finally come down.
TREASURY YIELDS ARE SURGING
Treasury bonds help set borrowing costs throughout the economy, including mortgages, business loans, credit lines, and other debt. When long term yields rise, financing becomes more expensive and investors start comparing risky assets against the return they can earn from government bonds.
WHY HIGHER BOND YIELDS MATTER
If investors can earn more than 5% from Treasuries, stocks and real estate have to offer a compelling reason to take additional risk. Higher yields can pull money away from more expensive assets and put pressure on valuations across the market.
THE STOCK MARKET IS WEAKER THAN IT LOOKS
The S&P 500 has performed well this year, but the headline index hides a much weaker market underneath. More than 4 out of 10 S&P 500 stocks are down this year, while a relatively small group of giant technology companies has generated a huge portion of the overall gains.
THE MARKET IS EXTREMELY CONCENTRATED
Seven of the largest companies now make up more than a third of the S&P 500, while the top 10 represent roughly 40% of the index. That means the performance of a handful of companies can have an enormous impact on an investor who believes they own 500 evenly distributed stocks.
AI IS HOLDING UP THE ECONOMY
AI spending has become a major driver of economic growth, while other areas are slowing. Job growth has weakened, housing construction is declining, and investors are beginning to question whether hundreds of billions of dollars being spent on AI infrastructure will ultimately generate enough profit.
THE AI TRADE IS GETTING TESTED
Investors have recently punished companies even after strong earnings because of concerns around rising AI spending. If the largest technology companies begin disappointing investors, the concentration of the market means weakness could spread quickly throughout the major indexes.
THE MIDTERM ELECTION EFFECT
Historically, midterm election years have been more volatile than other years in the presidential cycle. Much of that weakness appears to come from uncertainty over taxes, spending, regulations, and control of Congress.
WHAT HAPPENS AFTER MIDTERMS
Historically, stocks have often performed strongly once the election is over and uncertainty disappears. Since 1950, the S&P 500 has been higher 12 months after every midterm election, although past performance obviously does not guarantee the same outcome this time.
THE FED PAUSE
The Federal Reserve kept rates unchanged at its latest meeting, but that does not necessarily mean rate hikes are finished. Inflation remains elevated, and the Fed has indicated that future decisions will depend heavily on incoming economic data.
ANOTHER RATE HIKE EXPECTED
Markets are still pricing in the possibility of additional tightening. The best case is that oil prices fall, inflation cools, and the Fed stops raising rates. The worst case is inflation staying elevated while the job market continues weakening.
STOCKS ARE NOT CHEAP
The CAPE ratio is near levels rarely seen outside the dotcom bubble. At the same time, forward earnings make valuations look less extreme, so the key question is whether corporate profits can grow fast enough to justify current prices.
WHAT I’M DOING
I am still investing consistently, but I am also keeping some cash, staying diversified, avoiding debt, and maintaining an emergency fund. I am not trying to predict a crash. I just want to be in a position to buy if markets fall instead of being forced to sell.
Timestamps:
00:00:00 - Intro: The Federal Reserve Meeting
00:01:12 - The Bond Market Collapse
00:03:40 - The Market Selloff
00:06:12 - Buying / Selling / Trading Cryptocurrency
00:07:55 - The Midterm Curse
00:10:59 - The Federal Reserve Meeting
00:13:00 - How To Prepare
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