URGENT: The FED Cancels Rate Cut, Market Plummets, Major Changes Ahead

What's up Graham? It's Gas here, and you got to listen to what just happened. As of a few hours ago, the Federal Reserve decided to once again pause rates throughout the beginning of 2024. But as you're about to see, this is soon going to change absolutely everything. That's because Goldman Sachs believes that we'll get as many as five rate cuts this year, beginning as early as next month. A brand new bull market is taking shape on the belief that money will quickly become a lot cheaper, and this has the potential to impact the entire economy—from stocks to housing to savings accounts and even how much interest you pay on a credit card.

So given today's comments from the Federal Reserve, they're warning for everybody watching and the fact that rising inflation is threatening to jeopardize their entire plan. Let's discuss exactly what's going on, what Jerome Powell recently said, what this means for all of you watching, the impact this is about to have on your money, and what you could realistically do about it to come out ahead.

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All right, now before we go into the biggest changes about to take place over the next few months, one of the single biggest factors when it comes to rate cuts or hikes, for that matter, is what's happening with inflation. And recently, it's not looking as good as expected, with inflation coming in higher than projected at 3.4%. So what went wrong?

Well, when it comes to this, there are two ways to track the prices of goods and services, with the first being tracking the prices of everything. As you can see, when you calculate the cost of all items, inflation did increase from 3.1 to 3.4%, and that was mainly driven higher by one single category, and that would be housing. For instance, even though other items like fuel, apparel, medical care, and food away from home all saw rather substantial declines, shelter increased by half a percent at the end of the year. And since this makes up a third of the overall inflation reading, it pushed up the headline number that we see here.

But separate from that, we also have what's called core CPI, which purposely excludes more volatile categories like food and energy, since those tend to be a bit more seasonal. And because of that, the Fed believes that this is a more accurate measurement of whether or not we're heading in the right direction, which is good news because core CPI came in slightly less than the month prior at 3.9%, the lowest reading since May of 2021.

However, you should just keep in mind that housing does make up a large percentage of this, and if you remove housing from the equation, since it's largely driven by one-year rental rates, you'll begin to see that inflation has actually been below 2% for almost an entire year. Or I guess, in other words, yes, inflation did go higher, but a large portion of that increase is based on a lagging indicator that's already shown to be declining, and it's probably not going to show up towards the middle or end of this year.

So even though that helps explain why we're seeing some of the rising inflation while we're on the topic of housing, before we go into what Jerome Powell just warned us about, let's talk about what we're seeing throughout the overall market because there's a lot to break down. To start, let's discuss the good news and then the bad news. The good news is that the more time goes on, the closer we're getting to the elusive soft landing, where inflation gracefully declines without us seeing a recession or higher unemployment.

After all, just consider that we've seen the most rapid increase in interest rates ever in history. We made it past a bear market in 2022, with major indexes down as much as 15 to 20%, and we've come down from the inflation peak of 9.1%. All job growth stayed strong. However, the bad news is that according to a recent report, a soft landing means the top 1% gets record stock prices while you get stuck with the most unaffordable housing market ever, along with permanent price increases and record credit card debt.

Like, just consider that if inflation were to suddenly spike up by 10%, chances are asset values would also go up by 10% alongside with it. But for everyone else who's not invested, well, unfortunately, everything just became 10% more expensive to buy.

So what's driving the market now? Well, according to US Bank Wealth Management, if investors anticipate higher rates in the future, it reduces the present value of future earnings for stocks. But now the opposite is true. If investors anticipate rates will decline in the future, or basically if we believe interest rates are going to be higher in the future, stocks fall. And if we believe they're going to be lower in the future, stocks rise. And that's why we're seeing almost all-time highs.

Although even though all of this on the surface seems like quite the comeback, once you begin digging deeper, you'll begin to realize that's not quite the case. That's because despite record prices on the index, the Russell 2000, which tracks small-cap stocks, is still in a bear market, trading 22% lower than its 2021 peak. These are companies who are highly reliant on debt; they're easily affected by monetary policy, and inflation has a larger impact on their bottom line.

This is also the first time ever that the S&P 500 is in a bull market when small caps are in a bear market. Some economists even call this an economic bellwether. Its slump could be a sign that growth is about to slow after the US defied forecasters' gloomy predictions to dodge a long heralded recession last year.

So in terms of what this means, how this will affect both stock and real estate prices, and why top economists say that it'll be a miracle to avoid a downturn, here's what you need to know because this will explain everything. Although before we go into that, I realize that we've got a lot of business owners and entrepreneurs who watch the channel to learn how to optimize their business, make more money, and operate more efficiently.

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All right now, in terms of the overall economy, a lot has recently changed. And as far as where to start, let's begin with the 2024 stock market. Look, we've spoken about it earlier, but the markets have become wildly obsessed with the promise of lower interest rates and lately I've become obsessed with trying to figure out what comes next.

So in terms of what you could expect for the future, look no further than a Wealth of Common Sense blog. This is one of my personal favorite reads because the writer Ben Carlson breaks down a wide variety of financial topics, and if you'd like to follow along, I'll link to him down below in the description. I would highly recommend it.

But in terms of what we're seeing now, according to him and his data, the 2022 downturn was rather mild in the big picture. As you can see, out of 11 bear markets since 1950, nine of them were worse and saw a larger drop than what we recently experienced. So in terms of what's likely to happen next, this is what I found the most surprising.

In all but one case, in 2007, all-time highs led to even more all-time highs one year later. And besides the 1960s and 1970s era of stagflation, three, five, and ten-year total returns were also positive. This suggests that statistically, we're more likely to see stocks having consistent gains, or at least we're more likely to see gains than we are losses.

However, I do want to mention that Yahoo Finance somewhat disagrees with this, pointing out that since 1990, every time the Federal Reserve lowers rates, the market drops. So who's right? Well, historically, since that point, the Federal Reserve has not had to lower rates unless they absolutely have to. It's not like they go and say, "Hey guys, so, uh, the stock market's not going up as much as we want, so here's a rate cut to go up even more."

Instead, they drop rates in anticipation of events that could be disastrous for the economy, almost as a way to soften the blow before things get too bad. Like, just take a look at the last three examples. In 2001, they dropped rates at the start of the dot-com bubble. In 2009, they dropped rates during the Great Financial Crisis, and in 2020, they dropped rates before everything shut down, almost as though they knew something the rest of us didn't.

Anyway, in these cases, the market drop was not due to the rate cut itself, but rather the events that caused the rate cut to begin with. So with rate cuts expected to happen soon, is that going to lead to a market sell-off? Well, partly. On the one hand, since the market is always forward-looking, it could sell off because rate hikes might already be priced in. There's also the chance that the Federal Reserve is forced to lower interest rates if the national debt becomes too expensive to maintain, or there's the chance of a Black Swan event that nobody sees coming.

Although in the big picture, as of right now, it does appear as though the market's on a very positive path forward, and we're unlikely to see any major volatility. But what about the housing market? Well, in terms of home prices, here's what you need to know.

According to a recent report from Zillow, buyers are finally seeing some relief in the form of lower mortgage rates, and sellers' rate locks are beginning to wear off, with more of them beginning to come to the market and sell their homes. Case in point: a recent Zillow survey of homeowners found that 21% are considering selling their home within the next three years, up from 15% a year ago.

This is big news because back then, homeowners with rates above 5% were nearly twice as likely to consider selling, but now this includes all homeowners, even with the ones with rates below 5%. On top of that, it's also reported that prices are actually beginning to fall. For instance, home values only climbed month over month in just three of the largest 50 metro areas in December.

Now sure, December is typically a seasonal slower month for the market, but new listings are up 2.1% compared to the year prior, so we are seeing a rebound. But I will say the downside is that for buyers, listings are still going under contract in about a month, which is 50% faster than pre-pandemic norms. But hey, at least the mortgage company Freddie Mac anticipates that mortgage rates will ease throughout the second half of the year, while remaining in the 6% range, which is a bit lower than what we have today.

Of course, as far as prices are concerned, they say that demand for housing will remain high based on a large share of millennial first-time home buyers looking to buy homes, which will push prices up. We forecast home prices to increase 2.8% in 2024 and 2% in 2025 nationally. It's also anticipated that 2024 is going to be what's called a pivot year, where home builders meet the pent-up demand for single-family and multifamily housing, adding some much-needed supply back on the market.

Separate from that, I've also mentioned it before, but not all markets are created equally, and it's going to be highly location-dependent in terms of which areas do the best. Like, Bright MLS explained that they believe Miami, San Diego, Los Angeles, Las Vegas, Tampa, Nashville, Austin, and Orlando, among others, are likely to see a marginal decline, while Indianapolis, New Orleans, Chicago, Pittsburgh, Detroit, and Louisville could see prices increased by as much as 5%.

In the big picture, though, Redfin believes that 2024 will see a median drop of 1%. Zillow thinks we'll see a drop of 0.2%. Morgan Stanley anticipates a drop of 3%, and JP Morgan believes that affordability could be resolved by the time 2027 comes around. But as far as who's right, it's really anybody's guess. Personally, I tend to believe that since real estate is all about location, location, location, some prices might begin to slip, but other areas that had their own supply and demand metrics could begin to go even higher.

Although in terms of everything else and what Jerome Powell just said, here is exactly what you came for. Like I mentioned earlier, the Federal Reserve has decided to once again pause rates for the foreseeable future, and in terms of when the highly anticipated rate cut is going to happen, the truth is they're leaving it to be determined. And the more time that goes on, the more it's looking like realistically it'll probably happen towards the middle of the year.

For example, Jerome Powell recently reflected a growing sense that inflation is under control and a growing concern about the risks that overly restricted monetary policy may pose to the economy. Reuters also pointed out that they no longer include the phrase "unacceptably high" to describe inflation while laying out reasons why they felt inflation would continue to fall.

And to make things even more optimistic, all but two Fed officials see the benchmark policy rate lower by the end of 2024 than it is now, with the majority of policymakers seeing it trimmed by at least 0.34 of a percentage point. My thought is that they're going to need to be 100% certain that inflation is on a downtrend to be able to lower rates, and even when they do that, they're going to have to take it very slowly just to make sure nothing goes wrong.

However, even though I say that, that's not stopping the market from speculating on when this is going to happen. And as of right now, investors are pricing in a 90% chance of a rate cut in May, a 100% chance of a rate cut in June, and an 80% chance of a further rate cut in July. Obviously, these numbers change all the time depending on a variety of factors.

But as one Fed member said, a March rate cut isn't out of the picture. "You make the call when you get to the meeting, but I see no reason to move as quickly or cut as rapidly as in the past." Not to mention, I've said it before, but there's also very much a lag effect to raising or lowering interest rates, where the full effects aren't going to be felt throughout the economy for a following 6 to 18 months.

Like, the average delay is 11 months, meaning we probably won't feel the effects of today until the end of the year. This is also why I feel like unless something breaks, the Fed is going to move incredibly slowly just to see how everything plays out.

So in terms of my own thoughts and what you could practically do with this information, here's what I think. As far as the stock market is concerned, from my perspective, I do worry that some of the rate cuts are already priced in since the market's trading at an all-time high. This partially reminds me of some of the hype surrounding the Bitcoin ETF, where prices were the highest from the anticipation of the event and not the event itself.

This is the entire backbone of the phrase "buy the rumor, sell the news," since a forward-thinking market only cares about what's next. Now, this doesn't mean I'm predicting the market will fall alongside with rate hikes, because the truth is absolutely no one knows what's going to happen, and all the charts seem to imply that stocks only go higher after entering a bull market.

But it does serve as a reminder not to get ahead of yourself. Keep investing as usual and invest long-term; in the short term, absolutely anything could happen, and it's important not to get caught up in the day-to-day movements of the market.

Like, this reminds me perfectly of what's called the Magellan Fund. This was the world's best-known mutual fund, which saw record-setting profits under the management of Peter Lynch from 1977 to 1990. In fact, until the year 2000, it was the single largest mutual fund until it was eventually overtaken by Vanguard.

But even despite all of their success and having outperformed the market substantially over 15 years, it was reported that the average investor lost money under Peter Lynch's tenure during a time where the fund returned around 29% annually. So why was this? Well, during those years it experienced some times of explosive growth and devastating losses.

So when investors bought on the hype and then sold as soon as it went down, they locked in their losses and lost out on all the subsequent growth. Had they just held on for another 10 years. The problem tends to be that when you look at investor inflows, meaning how much they buy in, most investors enter once it's already outperformed the market.

Causing the fund to buy even more shares of the underlying companies, causing them to go up in prices as a result. But once the fund underperforms and goes down, investors sell, causing them to sell the shares alongside with it, becoming a self-fulfilling prophecy. Basically, this suggests that you shouldn't only start buying when the market is moving up, and you shouldn't only start selling when the market is moving down.

A good, consistent long-term plan tends to make you the most money, as long as you're careful about it. And this is exactly why I follow that exact strategy to buy in long term. Along with hitting the like button and subscribing if you haven't done that already.

So with that said, you guys, thank you so much for watching, and also a big thank you to Dropbox for sponsoring this video. Check them out in the description below. I appreciate it, and until next time!