Richard Stroud
United Kingdom
3m
COPIERS AND FOLLOWERS UPDATE Hi everyone, on the back of more economic news and the Federal Reserve rate decision last week, here is another update for you all. Last week was the eagerly anticipated interest rate meeting at the Federal Reserve and the outcome was a largely anticipated 0.25% cut, although some analysts had even predicted a larger half-percentage chop. More importantly, there is now plenty of intrigue over the future rate decisions as the Fed now expects to cut twice more this year, on the way to bringing the funds rate down to 3% in 2026, a level regarded overall as the "neutral" rate. Markets weren't really sure what to make of it all, with an initial rally fizzling out to post losses on the day of the rate announcements, but stocks since picking back up again. Lower interest rates generally boost stocks, due to corporate borrowing costs falling and consumers also having less to pay on credit and mortgages, leading to more disposable income. However, whilst short term rates did indeed fall, the yield on longer dated bonds rose as bond traders looked to the future with an eye on the risks ahead. Whilst the Fed stated a more rapid rate of cuts for the remainder of the year, it anticipates only one cut in both 2026 and 2027 with no cuts coming in 2028. The mix between restrictive and loose monetary policy (or hawkishness and dovishness) have left markets a little uneasy. Powell characterized the rate move as a "risk management" cut, with one eye on a slightly weakening U.S economy. However, inflation remains stubbornly well above the 2% Fed target and lower rates could be a real risk to this target in the future. Turning to the stock markets, 2025 has so for proved another positive year, with AI once again providing a lot of the impetus for the continued rally, minus the blip when Trump first announced his tariff policy. A school of thought which has been doing the rounds during 2025 is the possible similarity between the AI investment theme and the dotcom bubble of the late 1990s, which led eventually to a huge drop in stock markets over the first couple of years of the 2000s. However, right now earnings growth is still very strong among the main protagonists of AI (i.e the magnificent seven, amongst others), which was also the case back in 1995 when superior earnings growth justified high valuations. Like today, valuations, while high, were never excessive. Of course, fast forward 4 to 5 years time to 2000 when stocks started to tumble, one of the main possible catalysts for the markets turning was the Fed delivering rate cuts two years back in 1998. An apparent over-reaction from the Fed on the back of some market turbulence seemingly poured fuel over the stock market, by this stage now approaching more like mania territory and set the stage for a melt-up in stock prices that came crashing down spectacularly in March 2000. The similarities between then and now are quite enticing and is worth remembering the old saying that, while history does not repeat itself, it rhymes. It is at this stage that I have to remember to take a few deep breaths. As I have already mentioned in several previous posts, my past reservations about stock market volatility and frothiness have meant I have kept the portfolio far too conservatively invested, missing out on gains that all the major U.S indices have enjoyed in 2023 and 2024. I do think that, for the moment, the markets will continue to gain and now more rate cuts have been announced I think this will act as a positive catalyst for stocks in the near future. But I always think it is worth remembering Warren Buffet's famous quote; "Be greedy when people are being fearful and be fearful when people are being greedy". In my opinion, people are not being greedy right now, but this will undoubtedly change at some point. Hope you have a great week! Best wishes, Richard.
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