2025 Rate Cuts Canceled: What This Means For You

Welcome back to We're Talking Money. I'm your host, Phil Clark, and today we're diving into the latest shakeup in the markets, and I'm talking about the stock markets, really the global markets: the Federal Reserve's latest decision, which you saw last week, to cancel rate cuts for 2025. We need to talk about what that means for you as an investor.

Now, you saw markets react really fast last week. We saw fits and start in the market, and the risks seem to be escalating. Let's break all of this down.

The Federal Reserve, they dropped a bombshell last week when they cut interest rates by another 25 basis points. Federal Reserve cutting interest rates by one quarter point to a new level of 4 and A4 to 4 and 1.2%. But here's the real twist: they essentially cancelled the anticipated rate cuts for 20125. Just a month ago, you can see that they were only projecting four rate cuts in 2025 anyway, but just four weeks later, which was last week, they're only projecting two rate cuts in 2025.

All of this is spreading fears of potential market bubbles. The rate cuts were supposed to provide relief for overvalued markets, and without them, the financial landscape, it changes pretty dramatically.

So where are rates headed in 2025? It's hard to say, but my best guess, probably they're not going to move very much in 2025. You can see a lot of uncertainty has influenced the Fed. Just a month or so ago, they were talking about four rate cuts in 2025, maybe bringing the rate down to, say, three and a half. Today that forecast is calling for two cuts, and frankly, I think if inflation continues to tick higher, the Fed will have very little reason to cut rates in 2025. The exception might be a severe rise in unemployment.

So basically, the Fed does not want to risk cutting rates too much and overshoot the neutral rate. That would almost surely trigger reacceleration of inflation. They also don't want to leave rates too high for too long. That could lead us into a hard landing, a severe recession. They're threading a needle. If you listen to Jerome Powell's testimony, the ambiguity seems to be growing.

So at the very least, I think the Federal Reserve needs to pause at some point, and probably pretty soon, to really assess how the economy is doing and how it's interacting with the current level of interest rates. The Fed has a dual mandate. They need to be working hard to keep inflation low and stable while at the same time keeping unemployment low.

Unemployment weakened over the summer in 24, but that caused a lot of worries. It left people believing that rates were still too high. It has stabilized since that time. The progress in getting it all the way back down to 2%, which is the Fed's target, that has slowed, if not stalled.

So the Fed's preferred inflation measure, that's what we call the personal consumption expenditures price index excluding food and energy, so AKA core PCE. It's hovered in the and A2 to 3% range in the last few months, but in recent months that number has been ticking up. It's really the culprit to the Fed's about-face on rates.

According to this study, consumers are deeply concerned about inflation. Prices are still 25 to 30% higher than they were just a few years ago coming out of COVID. As you remember, things really escalated. The rate of prices moving higher has come down, but the prices of the products and services that you purchase, those have not come down.

Let's talk about valuations in the stock market and what that looks like right now. We're seeing sky-high valuations, housing, and even cryptocurrencies like Bitcoin off the chart. A lot of experts, they've issued warnings that suggest we are in dangerous territory, maybe reminiscent of the dot-com bubble and certainly the 2008 financial crisis.

Here's what's really alarming: the S&P 500 is predicted to deliver low annualized returns over the next decade. There's reason to believe that it won't be moving at a much better clip than, say, 0 to 7%. Let's hope I'm wrong. Some major institutions, they're forecasting that the S&P 500 could drop 15 to 30, maybe even 40%, signaling extreme volatility is likely in our near future.

You can also look at something called the Buffett indicator, and basically it looks at the US stock market's current pricing divided by GDP. This measure suggests that stocks are severely overvalued. Warren Buffett has always said when this thing gets above, say, 150%, we're probably way overvalued. We're at about 208% back in September, and that has continued to move higher.

So what's the bottom line? This should be a wake-up call for every investor. We've been in a really good place for two years, but usually when you get two years of solid returns in the markets, you typically have to give up a year. So 2022, not so good; 23, 24, very good. I think 25 may be a challenging year.

Now let's talk about housing prices for a minute. They continue to defy gravity. They're up 5.9% in the last year, and all of this could be pointing to a potentially overheated housing market. I know it doesn't feel like it because things keep getting better and people's net worth is growing, but when prices rise faster than the fundamentals can support, corrections tend to follow.

As an investor, what should you do in these uncertain times? First, diversify your portfolio. I say you should avoid overexposure to high-risk assets. Consider reallocating into more stable sectors, maybe like utilities, consumer staples, even some cash equivalents. Bonds over the course of the next year could present some really good opportunities here. Bonds can be a safe haven during equity volatility, and you want to keep an eye on the yields, which will help you better determine where opportunities might be, if not in bonds, in stocks. And when you see yields moving quickly, something is changing in the markets.

And then you can focus on fundamentals. Now is not the time for speculative positions. We've enjoyed those for the last couple of years. I applaud you if you took some of those risk, and I congratulate you on picking up a lot of gains, as I imagine you did. But right now I believe we're in a situation where evaluating companies based on earnings and cash flow and debt levels will take precedent, and that is going to help you make better selections. Investing is a long-term proposition.

Lastly, I want you to stay informed. Pay close attention to what the Federal Reserve announcements are bringing to you, the economic data, and key earnings reports. Knowledge is power, especially in times like these when things become a little bit more uncertain. Every market cycle will present opportunities if you know where to look.

Thanks for watching We're Talking Money. If you found this video helpful, don't forget to like and subscribe and hit that notification bell so you never miss an episode or the updates that we often bring. Let me know in the comments: how are you going to adjust your strategy in this volatile market, or will you just leave things status quo? I'll see you next time on We're Talking Money.