Finance Gurus Haven't Told You Something About Rate Cuts
Historically, cutting rates by 50 basis points has led to disaster. What does the recent cut say about our future?
Traders, Be Careful. The Markets Are Volatile
I have a confession— Last week, I expected the Federal Reserve to cut interest rates by 25 basis points and thought stock prices would immediately fall if the cut were any higher.
Yet, stocks scalped higher when the Federal Reserve lowered interest rates by 50 basis points — I wasn’t expecting that.
However, the markets declined over the two days following the announcement — I definitely expected that.
Now that rates are lower, finance gurus tell you to invest more in tech stocks, but they don’t seem to be reading the signs suggesting it might be risky. I am. So, here are some signs you should be aware of:
The Federal Reserve has a history of aggressively cutting interest rates by 50 basis points when the economy signals weakness.
Examples:
In 2001, the Fed cut rates by 50 basis points during the dot-com era, and the American economy crashed into a recession. Additionally, unemployment rose by 1.3 million.
In September 2007, the Fed cut rates by 50 basis points during the subprime mortgage crisis. Again, America’s economy crash-landed into the 2008 recession.
Fast-forward to today. The Fed cut interest rates by 50 basis points, unemployment is rising, and J.P. Morgan factored in a 45% chance of a recession by the end of 2025.
It’s wise to keep investing (I know I will), but it's wiser to invest carefully during volatile and uncertain times like this.
Be wise, don’t be fearful.
Rate Cuts Might be Your Ticket to Homeownership
Buying a house is the American dream. Although, for many Americans, it feels more like a nightmare since home prices are unaffordable.
For the past few years, America has had a housing crisis that has only gotten worse. Homebuyers struggled with limited home inventory, jaw-droppingly high prices, and, most recently, high mortgage rates.
Those factors caused many first-time homebuyers to surrender their dream and settle for the renting alternative.
But you might finally be able to dream peacefully again because the Federal Reserve just dropped interest rates by 50 basis points (0.50%). They also plan to continue lowering interest rates well into 2025.
Those decisions will likely impact mortgage rates, and many homebuyers sitting on the sidelines will finally be able to get in the game.
How will lower mortgage rates help homebuyers afford homes?
There are two main ways lower rates are beneficial for homebuyers:
First, lower rates help homebuyers save money on their monthly mortgage costs.
Here’s an example:
Earlier this year, mortgage rates sat around 6.4%. So, let’s do a little math…
If you put down 20% on a $600,000 home with a 6.41% mortgage rate, your monthly payment would be roughly $3,002 (not including property taxes, homeowners insurance, and other expenses).
However, let’s include the 0.50% rate cut — the same home price and downpayment with a 5.9% mortgage rate would be roughly $2,847/per month.
That means you’d save $155 each month or $1,860 every year.
And that’s not all — lower rates also give buyers more purchasing power. This means you can buy more house for the same monthly payment.
Let’s consider that your monthly spending budget is $3,002. With a 6.41% mortgage rate, your purchase price cannot exceed $600,000.
With a lower rate of 5.9%, you can expand your search to homes that cost $632,200 and still have a monthly mortgage payment of $3,002.
Why does this work?
Lower rates mean you have less interest to pay over the life of your loan, ultimately leading to a much lower monthly payment. So, you can buy a more expensive home for the same monthly cost.
That’s critical for homebuyers in high-cost cities like Los Angeles, Miami, New York, and Seattle.
Don’t give up on the American dream. You might be close to having your dream come true!
How to Read a Stock Quote: Part 2
Last week, we explored the chart, table, open, high, low, 52-week high, and 52-week low.
This week, we’ll cover market cap, p/e ratio, dividend yield, and CDP score.
Market Cap: Market capitalization is the value of a company based on its total outstanding shares. You calculate market cap by multiplying the total outstanding shares by the current stock price.
Example: When the above photo was taken, Apple was $220.82/per share. Apple has a total of 15.2B total outstanding shares. So, $220.82 x 15.2B = $3.356T. Apple has a market capitalization of more than $3.3 Trillion.
P/E Ratio: The p/e ratio (or price-to-earnings ratio) measures a company’s share price against its annual earnings per share.
Example: Apple’s earnings per share (how much profit you can expect to receive for every share you own) is roughly $6.57 in 2024. So, divide the share price ($220.82) by the earnings per share ($6.57), and you get a P/E ratio of 33.61…
Dividend Yield: Dividend yield is the amount of money you’ll receive as an annual dividend expressed as a percentage.
Example: Apple pays $0.25 per share four times a year. So, divide their total annual dividend payment ($1.00) by their share price ($220.82), and you’ll get a total dividend yield of 0.45%.
CDP Score: CDP stands for Carbon Disclosure Project. The CDP assesses the performance of companies relative to their environmental impact and then rates them.
Tools and Resources
To learn more about:
Dividend stocks, click here. Comment “dividend” on the post, and I’ll send you 3 stocks from which I’ve earned years of passive income.
Stock quotes, click here.