URGENT: Federal Reserve STOPS Rates Hikes, Prices Fall, Major Pivot Ahead!

What's up, you guys? It's Graham here. And if there's one video you got to pay attention to, it's this. As of a few hours ago, the Federal Reserve has decided to pause rates for the foreseeable future. Except this time, they included a very significant report that signals exactly what they think is going to happen throughout the rest of the year.

After all, this is happening during one of the most exuberant stock markets in history, having hit 25 record highs in just the last 6 months. Housing inventory is beginning to rise by the highest amount since the Great Financial Crisis. China just started to dump US Treasury Holdings at the fastest pace ever in history. And to top it all off, Bill Gates gets free McDonald's for life! The more you know.

Anyway, with Nvidia currently being valued at more than $100 million per employee, let's discuss exactly what the Federal Reserve just said and what their signal is for the next 12 months. That's going to impact stocks, real estate, and even how much you get paid in the savings account. And then finally, what you could do with all of this information to give you the best chances possible at coming out ahead.

On this episode of "Apparently 42069 is Not a Get Out of Jail Free Card," although before we start, as usual, if you appreciate the last-minute updates within hours of the Federal Reserve meeting, just do me a favor and hit the like button or subscribe. That helps with the channel tremendously. And as a thank you for doing that, I'll show you a picture of a kitten! So thanks so much, and now let's begin.

All right, so in terms of where all this starts and ends, look no further than this morning's inflation report. See, here's the thing: when it comes to the cost of products and services or how much they're increasing in price over time, there's a few ways to look at it.

With the first being PCE or Personal Consumer Expenditures. This tracks the cost of items from the perspective of businesses, and that tells us how much consumers are willing to pay for something across the board. Essentially, think of this like the canary in the coal mine, where if businesses see higher demand than increased costs, that probably means inflation is rising.

In this case, PCE was recently found to come in at 2.8% year-over-year. This suggests that prices are becoming incredibly sticky in the 2.7% to 3% range, especially because we have seen no meaningful decline in months despite rates being the highest we've seen in 23 years. However, even though it's a slight improvement from what we saw in 2023, it said that the Fed has suggested it will take more than a month of favorable data to confirm that inflation is reliably moving lower again.

So there's still no reason to think that a first rate cut will come any earlier than September. Although, separate from that, if you want even more indication where inflation is headed, we got some good news for you because the latest CPI inflation report was just released this morning on June 12th. If you're curious what was in it, here's what happened: on the surface, headline CPI decreased to just 3.3% a year, mainly driven by the fact that oil and groceries are beginning to come down in price.

On top of that, we can also see that all items, when averaged out, increased by nothing in the month of May, which begins to signal that inflation has continued to move in the right direction. For instance, more specifically, we could see that month over month, energy prices fell by 2%, new cars fell by half a perc, all items less food and energy only rose by 2%, and the most important from all of this, shelter only rose by 4%.

Which, even if that continues over the next year, is still less of an increase than we saw year-over-year last month. Of course, to dig a little bit deeper into the recent news, we also have what's called core CPI, which purposely excludes more volatile categories like food and energy since those could be a bit more seasonal. Most economists tend to agree that this is the preferred measure of inflation.

When it comes to this, core CPI actually declined to 3.4% down from 3.6% a month ago. Overall, it does seem like these reports are incredibly promising, which is why the S&P 500 recently hit a brand new record high a few hours ago. But ultimately, from the Federal Reserve's perspective, it's still a little bit too soon to celebrate.

So in terms of how this is going to impact you, let's talk about number one: the stock market. Like I mentioned earlier, the S&P 500 reached its 25th record all-time high this year, mainly driven higher by two categories: one, that interest rates will come back down, and the second is NVIDIA—yeah, seriously! As Market Watch reported, for the first time since 2000, just three stocks make up 30% of the entire index, and that's Microsoft, Nvidia, and Apple.

This means that despite the fact that 40% of the entire index is negative for the year, just a few very large companies are responsible for the vast majority of profits. That also means if they go down, everything else goes down with it. Or I guess put another way, as Market Watch explains, these three companies and their performance mask the true vulnerabilities within the economy.

As a perfect example of this, look at what's called the Russell 2000. This tracks 2,000 smaller companies here in the United States, and when you compare that performance with that of the S&P 500, you could see that it's at a multi-decade low, back to the same ratio we saw in 2001. In fact, some even believe that the valuations we're seeing today in tech draw very similar comparisons to what was happening in the late 1990s during the dot-com bubble, when just a few stocks made the vast majority of profits.

After all, even though Nvidia makes a lot of money, they're currently being valued at $102 million for every single employee, which compared to everybody else is high. Although, even though this could certainly be a cause for concern, a separate analysis found that just a few companies leading the market can actually be a good thing for future profits. Why? Well, since 1950, it was found that a higher concentration led to even higher returns, especially since those were the companies generating the most revenue.

However, in terms of what will actually happen over these next 12 months, the truth is it's anybody's guess. For instance, Baron believes that the stock market has much more room to climb because there's a lot of money sitting on the sidelines parked in short-term treasuries. Or I guess, as they say, institutions have $440 billion that is still yet to be deployed.

There's also a money supply of $21 trillion that's flowing throughout our economy. To take that a step further, a Goldman Sachs representative recently said that there's a wall of money from passive equity allocations that'll pour into the stock market in early July. It's also worth mentioning that so far the S&P 500 has been positive for nine straight Julys, posting an average return of 3.7%.

The NASDAQ 100 has an even better track record, boasting gains in 16 straight Julys with an average return of 4.6%. UBS even commented that they see the S&P 500 reaching 5500 by year-end amid Fed rate cuts, robust profit growth, and the secular growth trend brought on by artificial intelligence.

They also expect that the Fed is going to cut rates twice this year, which should provide a healthy backdrop for stocks. Now, of course, China, on the other hand, is not so optimistic—with the entire BRICS nations dumping the highest amount of US treasuries and government debt ever recorded in history. In fact, it said that as China is dumping both, despite the fact that we're closer to a Fed rate cut cycle, there should be a clear intention of diversifying away from US dollar holdings.

Although in terms of how this is going to affect other markets, look no further than housing prices. For those unaware, both Zillow and Redfin released a monthly housing report that details everything from home prices, new listings, transaction volume, and migration trends across the United States.

And in terms of what happened last month, well, you're going to want to hear this. Overall, they found that median housing values increased another 6.2% year-over-year to almost $434,000, which is the highest amount ever on record. And fortunately, on the bright side, there are 10% more listings on the market today than a year ago. But as you could see, that's still 20% below pre-pandemic levels.

This has resulted in almost 44% of homes going under contract within the first two weeks of being listed, down from 47% a year ago. And 18% of sellers were found to have cut their asking prices, likely because they just wanted too much money in the first place. But that's besides the point. So far, housing prices have remained high despite higher mortgage rates simply because there's not enough inventory on the market to satisfy demand.

But that is slowly beginning to change. For instance, Zillow has just revised its 2024 prediction and they forecast that housing prices will only rise 6% for the rest of 2024 and could actually decline by 0.9% over the next 12 months. As they say, an uptick in inventory is causing some listings to linger on the market for extended periods, resulting in more negotiating power for buyers.

However, in terms of where housing prices could go over the next 5 years, one report, which I'll link down below in the pinned comment, gives us four scenarios and I tend to agree with them. It starts with this: first, home prices will continue to rise, but at a much slower pace. Second, more homes are going to be built, therefore adding on more inventory to the market. Third, mortgage rates will hopefully begin to fall as inflation hopefully begins to come back down.

And fourth, housing will continue to remain at least somewhat competitive thanks to strong job growth, income, and scarcity of land in desirable neighborhoods. Although on a separate note, another topic that should be gaining a lot more attention right now is also what's happening with rent. For those unaware, a recent study just found that thanks to soaring housing costs, renters are actually choosing to stay in their homes for longer, with one in six staying in their home for 10 years or more in 2022, up from 13.9% a decade earlier.

In a way, Redfin says this is beneficial actually for both landlords and tenants since tenants could hopefully stay where they are to save some extra money, and landlords get more predictability without having to go through a vacancy. Essentially, the housing market is still incredibly competitive, but conditions are slowly beginning to ease. By 2028, we could be back in an environment where buyers are back in charge.

Although in terms of Jerome Powell's latest comments, his prediction for the future and whether or not they're going to raise or lower interest rates here is of course what you came for. To start, every quarter the Federal Reserve releases what's called their Summary of Economic Projections, which basically encompasses their overall expectations on employment, inflation, interest rate hikes, and other metrics associated with the economy.

And in terms of what happened this morning, listen up: according to their projections, they forecast core inflation subsiding to 2.8% by the end of the year, falling to 2.3% by the end of 2025, and then finally leveling off at 2% by the end of 2026. This signals very little indication that they'd raise rates any higher than they are today, which is good.

In addition to that, they believe that the unemployment rate is going to uptick slightly in 2025 to 4.2%, and that GDP overall will remain in the 2% range, which is fairly consistent with expectations. However, when it comes to interest rates, this was the biggest change. They expect to keep rates in the 5.1% range in 2024, which is significantly higher than their mark projection of 4.6%.

In fact, they've signaled that they expect to keep interest rates higher for longer, even throughout 2025 at 4.1%, or basically they're signaling the potential of only one rate cut in 2024. In the long run, they expect to keep rates in the 2.8% range. Although in terms of what Jerome Powell just said and his warning for the future, like I mentioned earlier, they've decided to pause rate cuts once again until more progress is made with inflation.

After all, as of right now, inflation is higher than they would like. Prices aren't meaningfully coming down as much as they want. And if they give any indication of a rate cut, the market would probably just soar and make inflation that much less likely to actually come down. Plus, the economy has so far seen the soft landing that everyone has been dreaming about since 2022 with no indication whatsoever of an upcoming recession.

In a way, this is the ideal scenario for the Federal Reserve because as long as they could maintain the status quo, in theory, they could take their time and then reduce rates when absolutely needed. For example, Canada just recently reduced their rates by 25 basis points on the news that inflation declined at 2.7%, and their GDP began to slow.

At some point, the United States or other G7 nations could begin to follow. Also, fun fact, but it's been almost a year since the Federal Reserve last raised interest rates! It honestly feels like a few months, but time absolutely flew by. Anyway, back then, most economists truly believed that we'd only see these interest rates for 4 to 6 months before the Fed would begin to reduce them.

Like earlier this year, there was still the impression that we'd see six rate cuts by December, but higher than expected inflation completely turned that expectation upside down. And now here we are with the expectation that we're probably only going to see one or two rate cuts, that's it. Although, if there's anything that's certain, it's that nothing is guaranteed and all of this is going to be completely dependent on the data that we see over the next few months.

That could change dramatically for better or worse. Like I've said before, I firmly believe that interest rates are going to remain higher than people expect for longer than people expect. I mean, just think about it: if inflation takes longer to cool down, if the stock market continues to stay strong, and if people get used to higher interest rates, why risk reigniting inflation with rate cuts unless they absolutely have to?

If anything, keeping rates higher is going to give them more leeway to reduce them if and when they actually need it. But then again, it's important to remember that the stock market is not the economy, and just because we have high interest rates doesn't mean that stocks can't continue going higher. Like, just look at the performance ever since rates started going up. Very few people could have accurately predicted that type of outcome.

That's why, practically, I'm just doing my best to dollar-cost average into the markets on a regular basis, ignore the noise, and be cognizant not to take on any high-interest rate debt. That's it! Yes, it's very boring, and it's not as exciting as going YOLO in GameStop call options, but it's a timeless strategy.

And that's why sometimes everything I talk about is going to sound repetitive, because what works today is probably going to continue working over the next 50 years. As an example of this, I really like this article from a "Wealth of Common Sense" blog that breaks down the worst returns of the S&P 500. As you could see, over 10 years, there's a lot of variables that could either leave you with a small loss or up to a 20% annualized profit.

Over 20 years, everything has so far been profitable, with the worst ever return happening after the Great Depression. After 30 years, the market historically hasn't returned less than 8%. That's why I tend to personally just keep on the same path regardless of any external circumstances, and I tend to believe this is going to have the best result long term by the time we're all old enough to get the senior discount at Wendy's.

Oh, and lastly, for anybody who comes to the channel for regular updates like this, I just want to let everyone know that after 2 years being engaged, I just got married! So I'm going to be taking the next few weeks off just to be able to spend some time with family. Most likely, I'll be back in the first week of July, but if you want more content until then, check out my podcast "The Iced Coffee Hour." I'll link to it down below in the description.

I will be posting there every Sunday. We have so many episodes already filmed out, so like everything is already scheduled. So if you want to be a part of it, binge those episodes! We just recently had on Michael Saylor and Peter Schiff—those are pretty interesting. So if you want to binge that, enjoy! Thank you so much, and I'll see you in a few weeks!