Fed Rate Cut Explained: What It Means for Your Stocks

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The Fed Cut Rates: What It Really Means for Your Investments

Today, we're going to do the thing where we talk about the thing that happened last week. Yes, the Fed dropped interest rates. Why should you care? That is what this podcast is all about. Let's dive in.

What Actually Happened

The Fed cut rates by 0.25% or a quarter point. That happened last week on September 17th, and that was the first rate cut that we've seen on interest rates in over nine months. That's a big deal.

Have you been listening to my podcast? Do you know that I've been saying I didn't think they were going to cut rates significantly? And my opinion was I didn't think that they should, but they did. Again, I'm not an economist. I'm a lowly, but wonderful, financial planner.

And my hope is that you will understand how this is going to impact your money and the performance of your investments, because we're already seeing some impact with that.

Should You Run Out and Refinance?

Here's the deal on this. Yes, when you open up your phone, you're going to see that mortgage rates are now, as of today, at the lowest they have been in over three years. Does that mean we need to run out and refinance our house? No, it does not. It just means that they were starting to see interest rates come down a bit.

Why This Matters for Your Stocks

But there are more things here that we should really talk about, because when we take a look at your dollars that are invested in the stock market—and remember, the stock market is not the economy, and the economy is not the stock market, but there is a relationship between the two of them—and so when we see the Federal Reserve try to drop interest rates, they do that for a bunch of reasons that I've unpacked over time.

But what I really want to focus on here is why this has impact on your performance with the stock market. And if you understand that the companies that are represented on the stock market and the companies that you own in your portfolio—fractional shares that you own in your portfolio—they think of an interest rate drop very differently than you do when you think about it, "How much is it going to cost me to finance a car or how much is it going to cost me to finance a home?"

So let's take a look at their perspective and how it impacts the performance of your stocks.

Companies Get Access to Cheaper Capital

First of all, it gives them access to cheaper capital. So companies get to borrow money at much lower rates, and then what they tend to do is they want to spend that money on expanding operations, buying equipment, or actually acquiring other businesses.

And it allows them to refinance their existing debt, which, when you consider the millions and sometimes billions of dollars that a company may owe can actually save them millions of dollars in interest payments and make their companies more profitable.

And that, of course, makes new projects financially viable that maybe weren't before, including hiring.

Higher Valuations Mean More Profitable Investments

Now, as all of that happens for an organization or a company that is publicly traded, that has a direct—I think, loosely saying—direct impact on higher valuations. In other words, a valuation is nothing more than "How much is your company worth, person?"

So the higher the valuation, the more profitable your investments are. Lower rates can make company stocks more attractive compared to buying savings bonds and actually keeping money in money market accounts.

Also, they provide some buffer where future earnings get, quote-unquote, discounted at lower rates, which are making them worth more today. And therefore we see the value of the stocks that you own go up.

Tech Companies Especially Benefit

And then tech companies especially benefit because their value as a company isn't based on what they produce. It's what they do. And so that has an impact on those companies' future growth.

When you think about much of the rally, much of the growth that's happened in your portfolio over the last several years, it's been really, really dependent on tech companies like NVIDIA, Apple, Google, etc.

Consumer Spending Drives Demand

Lastly, companies that are publicly traded need to sell their stuff to somebody. So there are some benefits for these companies when interest rates drop because consumers tend to spend more when rates are low on things like cheaper mortgages or cheaper car loans.

And so that tends to drive up demand for companies to produce products and services, and that makes it easier, much easier, for consumers to finance big purchases like homes and cars.

You Wear Two Hats: Consumer and Investor

So as you can see, consumers are not the same as companies, and you are both a consumer and an investor. That's why we unpack things like this, so you understand that you really do wear two hats.

One hat is being a consumer where you're spending your money and what you can spend your money on or what you choose to spend your money on has a direct impact on your lifestyle.

Whereas when you have the investor hat on, you are investing in fractional shares of companies. And let's not forget, our rules about investing here in my office are: buy shares of profitable companies, own as many of them as you can and own them as inexpensively as you can.

The Bottom Line

So as an investor, we want to see companies more profitable and making investments in their companies because we want to participate in the upside of their growth.

When the Fed cuts rates, it's not just about you getting a cheaper mortgage—it's about the companies you own getting cheaper access to capital, which makes them more profitable, which makes your investments more valuable. The rate cut is good news for your portfolio because it helps the companies you own grow and thrive.