Tired of hearing about interest rates?
I get it. Stocks have been leaning into this headwind for a long time – first with a series of rate increases and then the interminable wait for rates to start coming back down.
But whether you’re sick of hearing about it or not, you should care if you invest in stocks.
Interest rates are one of if not the biggest factor affecting stock prices. No less than Warren Buffett himself said, “Interest rates are to asset prices like gravity is to the apple. They power everything in the economic universe.”
Barring an absolutely shocker from the Federal Reserve on Wednesday, the wait for rate cuts should finally be over. In fact, according to CME FedWatch, investors are pricing in a 100% chance of a cut.
The only question now is whether we’ll see a half-point (50 basis points) or quarter-point cut (25 basis points).
As of today, investors favor a deeper cut of 50 basis points (BPS): a 63% chance versus 37% odds of a quarter-point cut.
I’m in that 37%. I think the Fed will announce a more measured quarter-point cut – with multiple cuts to come later this year and into 2025.
You might think the bigger the cut, the better. That’s not necessarily the case, especially for stocks.
When easing into rate cuts, the S&P 500 is up 24% on average one year after the first rate cut. When the cuts are sharper, those gains shrink to just 5.2%.
Source: MAPsignals.com
A quick cut also hints that the Fed thinks we’re on the verge of a crisis, which isn’t the case right now. And the central bank would also be acknowledging that it should have cut sooner. That’s something they won’t want to do.
Of course, anything is possible.
Whether rates come down by a half point or quarter point, rate cuts are good. And they are particularly good for certain stocks.
These Stocks Are Set to Rise
When interest rates fall, small-cap stocks rise. Those are shares of companies with a market capitalization between $250 million and $2 billion.
You can see that inverse relationship in the chart below. The 10-year Treasury bond yield peaked in Oct. 2023, and the S&P SmallCap 600 bottomed.
Why does this happen? Well, small-cap companies get more bang for their buck as rates fall. They typically have higher debt than large-caps to finance growth. When rates fall, their debt payments shrink and earnings explode.
Small-caps also have high growth potential. So not only are they themselves getting more bang for their buck as rates drop, so will those who invest in them.
Just look at the forward return when the Fed cuts rates and there’s no recession then or a year later – which seems likely this time around. The Russell 2000 (a small-cap index) rallies – up 36.6% on average over the next two years versus 26.8% on the S&P 500.
This is a rare opportunity you don’t want to miss. And the earlier you get in, the more money you stand to make.
Big Money Is Moving In
I’ve talked recently about my Master algorithm and how it works. One of the most important being that it gives me “x-ray vision” to see what’s going on in the secret darkness of Big Money trading. That’s the measure of unusual institutional money flows over a 25-day moving average.
And my system is flashing all the signs that Big Money is already moving into stocks as they anticipate lower rates.
One way my system measures these money flows is through my Big Money Index (BMI). Despite seasonal volatility we’ve seen in September, a recent uptick in the BMI just broke it out to highs not seen since April of this year:
Source: MAPsignals.com
This is reinforced when we drill down into the daily unusual buy and sell counts. I see some moderate selling took place early this month (makes sense given the bumpiness we saw), only to be replaced with steadily increasing buying.
Money is clearly already flowing into stocks, not out of them.
This is confirmed when we also analyze daily unusual buy and sell counts. We see moderate selling early this month (those red bars circled below), only to be replaced with steadily increasing green bars – those green lights we love to see that are buy signals.
Source: MAPsignals.com
There’s also a record amount of cash in money market funds – $6.3 trillion to be exact. But those juicy 5% rates are about to fall one the Fed starts cutting. Big Money knows it, and its already positioning itself accordingly.
That cash is about to flood into the stock market, especially in to small-caps.
This is just now beginning, so there’s still time to get into the best-positioned stocks most likely to generate the biggest profits.
Talk soon,
Jason Bodner
Editor, Jason Bodner’s Power Trends
P.S. I go into more detail about the Master Algorithm in a special briefing on “Project Greenlight.”
It’s what fuels my investing services like Quantum Edge Pro, which focuses on small- and mid-cap stocks. The ones that are poised to benefit from the rate cuts that are likely being announced this week.
Click here now for all the details on Project Greenlight and Quantum Edge Pro.
