After 18 months of an expected recession driven by inflation, the Federal Reserve reduced rates by 50 bp yesterday signaling an end to the worst inflation in over 50 years. After pulling back yesterday, major indexes are soaring today with Tech, Small Caps and Banks leading the market. However, consensus remains mixed on whether the rate cut signals the end of inflation or a concern for trouble ahead.
Fed Chairman Jerome Powell emphasized the Fed “doesn't anticipate near-term growth issues” and lower inflation made the rate move possible. The Fed now shows a median target rate in the 4.25%-4.5% range by year-end, implying two more normal-sized cuts at the meetings in November and December. "It's really the rising unemployment rate that I think is the key to why the Fed decided it's time to move," said Kathy Jones, Chief Fixed Income Strategist at Schwab. "Inflation has been falling for quite a while but it's the weakness that we've seen in the labor market, I think, that is the catalyst for the Fed to get moving."
What does this mean for the market going forward?
With less than 50 days until a key presidential election, how the market will react is uncertain. Concerns about a potential market correction have increased, especially after Warren Buffett sold large amounts of Apple and Bank of America stock. As a respected investor, his moves are worth noting. At his May meeting, Buffett mentioned his cash position but noted he will only invest “if there's low risk and high potential return” and selling some shares now could be smart due to possible tax increases on gains after 2025.
What should individual investors do?
Sound investing continues to emphasize “time in the market” over “timing the market”. For retirees needing income in the next 6–36 months, it's wise to set income needs aside in safer assets. If you're many years from retirement, investing during market dips can lead to long-term gains when the market recovers. Should you sell if you are worried? Emotional investing is not a successful strategy. Selling before a perceived downturn may feel good. However, most people struggle with following Mr. Buffett's advice to buy when the market is low. Successful market timing means “selling high AND buying low”, which is very difficult for most investors.
Staying focused on your financial goals and mitigating risks while continuing to invest is generally the best long-term strategy.