Happy Friday! Today’s email covers:

• Rate Cuts: Coming Soon?

• The CrowdStrike Update That Halted The World

• Small Caps Having A Great Month… ETF To Buy?

• Reminder: Upgrade your subscription to unlock the full length weekly newsletter which includes: my portfolio updates, more market commentary and Weekly Q&A’s below

• Stock Market Recap For The Week (Week return as of market open, Friday July 19th)

  • S&P 500 = -1.65%

  • Nasdaq = -3.30%

  • Dow Jones = +1.29%

Rate Cuts: Coming Soon?

As I sit down to write this post (on Thursday July 18th), the current fed funds target rate is 5.25-5.50%

If we go back to 2020-2022, the fed funds target rate was 0.00-0.25%

We have been in this 5.25-5.50% range since the July 2023 FOMC Meeting. However, this may soon change.

According to the CME Group FedWatch tool, there is a 93.5% probability the Federal Reserve cuts rates 25bps to the 5.00-5.25% range during the September 2024 meeting. This would be the first change in rates in over a year.

Why are people predicting rate cuts?

Every month inflation data is released, both CPI & PCE. These inflation data points help the Fed understand if inflation is increasing, staying the same, or decreasing. The latest CPI print (June 2024) showed inflation was at 3% year-over-year. This was the lowest inflation data since June 2023. Therefore, many people believe the Fed is getting inflation under control & is working towards their 2% long term goal.

On the other side, some people believe the Fed needs to keep rates higher for longer, as the data is not strong enough to suggest inflation is under control. Heck, even the Federal Reserve Bank Presidents of multiple cities don’t agree as to when they should cut rates.

Raphael Bostic, head of the Atlanta Fed, said he favored just one rate cut this year — and not until the final three months.

While Neel Kashkari, president of the Minneapolis Fed, raised the possibility that the Fed might not cut at all this year.

Will the stock market go up once the rate cuts happen?

While most people would think it will, that has not always been the case, historically. Over the past 9 initial rate cuts, more than half of those were followed by declines in the S&P 500 ranging from -22.6% to -55.5%.

Four out of those nine times were followed by minimal weakness with strong 6-month returns.

On average, of the past 9 initial rate cuts, the S&P 500 had an average decline of -20.5% & an average 6-month return of 3.4%.[1]

So I ask you:

What is the takeaway? In the past, I have seen the Fed say they were going to do one thing, then do another. I recall when they were hiking rates, they mentioned they were going to slow the rate hikes, then for 4 meetings in a row, they hiked rates by 75bps. We cannot let the Fed’s decision dictate our investing style. If you are a long term investor, just stick to your plan.

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The CrowdStrike Update That Halted The World

Early on Friday morning (July 19th), CrowdStrike (CRWD) sent out an update that is breaking computers running Windows, causing them to crash and display the blue screen of death.

This is being called the “biggest IT outage ever” & here is a list of industries affected:

What is the takeaway? This outage is causing CrowdStrike stock (CRWD) to take a tumble early on Friday. As of writing this newsletter, CRWD is down -13.28% at market open.

Small Caps Having A Great Month

I know I talk a lot about the S&P 500 & the Nasdaq, however there has been a lot of talk recently about small/mid caps stocks. Over the past month there has been a solid rotation (some think) into small caps & we can see that by looking at another index, the Russell 2000. Others think we have not seen a rotation into small caps, rather people are just adding new money to small caps with the expectation that the Federal Reserve will soon lower interest rates.

The Russell 2000 Index is a small-cap U.S. stock market index that makes up the smallest 2,000 stocks in the Russell Index. Over the past month this index is up 8.97%.

What is the takeaway? While the S&P & Nasdaq are both positive for the past month too, they are underperforming the Russell 2000 by a large margin. This is why I share below which small cap ETF I buy to keep my portfolio diversified to capture outperformances like this past month. If you are looking at adding an ETF that tracks the Russell 2000 to your portfolio, one of the most popular is IWM.

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