Interest rates and stocks: Mark your calendar for the Sept. 17 Fed meeting

The U.S. Federal Reserve has hinted it may start cutting interest rates in September. We will find out more Friday when Fed Chairman Jerome Powell speaks at the central bank’s retreat in Jackson Hole, Wyoming.

The market is telling us it’s a done deal, with odds hitting 100% on CME FedWatch, a widely used tool that predicts changes in interest rates. The only open question is whether the cut will be a quarter of a percentage point or a half percentage point.

And as market strategist Charlie Bilello pointed out, the Fed has done exactly what the market expected it to in every meeting since 2009.

Warren Buffett compares interest rates to gravity, saying: “The value of every business—the value of a farm, house or any other asset—is 100% sensitive to interest rates.”

Rates up, stocks down. Rates down, stocks up. That’s overly simplistic, but directionally right.

There are two important takeaways as we approach a Fed easing cycle:

1. Interest rates and stock rotation

Spiking interest rates are a big reason large stocks rushed their smaller peers over the past few years.

Large companies borrowed billions of dollars during 2020/2021 at record-low rates. Over 90% of this debt is long-term fixed. Rising rates barely hit these companies. Small stocks, like those in the Russell 2000, aren’t so lucky. Roughly half their debt is “floating” rate.

These companies are paying two to three times more interest than they were a few years ago, which cannibalized profits. Now, with rate cuts on the horizon, investors are piling into smaller stocks.

2. Rate cuts typically boost stocks

Following each of the Fed’s first rate cuts of a cycle dating back to 1970, the S&P 500 was higher 13 out of 18 times, carving out a 13% gain, on average. The only times stocks tanked were during the early ’70s downturn, the dot-com bust and the 2008 financial crisis.

Our research shows the real dividing line is whether the U.S. economy dips into a recession or not. Rate cuts + no recession = higher stock prices.

My No. 1 way to ‘read’ the economy

Hedge funds pay for satellite images to count cars in Walmart WMT parking lots. Then they use these snaps to predict Walmart’s earnings before it reports.

There’s another way to get “the jump” on what’s happening in the economy that won’t cost you $100,000 a year. Listen to earnings calls.

Hearing what mega corporations like Apple AAPL or Amazon AMZN say about the U.S. consumer gives you a far better understanding of the situation than any government report ever will. We’re at the end of the second-quarter earnings season. So far, the number of companies beating revenue expectations is the lowest since 2019.

And the slowdown is mostly coming from sectors hit by higher borrowing costs. People are buying fewer cars and homes. Brunswick BC , America’s largest boat maker, said its customers are basically saying, “We’ll buy a new Bayliner when rates drop.” Funny how boat makers are now Fed watchers.

Meanwhile, credit-card firms and banks are saying on earnings calls that credit card delinquencies are rising to multi-year highs. If you’re looking for signs of a slowdown, listen to earnings calls.

Today’s dose of optimism

I live by this Confucius quote: “A healthy man wants a thousand things; a sick man only wants one.”

When you’re healthy, you have many desires and goals. But when you’re sick, all those other wants fade away. You only care about one thing: getting healthy again.

The best way to live a long, healthy life? Exercise.

Research from Peter Attia, a physician and longevity expert, shows exercise is the behavior most strongly associated with extending your life. In short, every hour you spend exercising is likely to give you six to eight hours of additional healthy life. That’s literally the deal of a lifetime!

Run … row … bike … swim … lift weights … box … train in jiu jitsu … practice gymnastics. Do some form of exercise until you’re “out of breath” at least every other day.

Don’t slack on your fitness. Future you will thank you.

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