The market is surging after rate cuts
The Federal Reserve officially cut the fed funds rate, or short-term risk-free interest rate, by 50 basis points (0.5%) last week and the market initially reacted negatively before rallying on Thursday. I have explained why I don’t think rate cuts are all that important for long-term investors here, but the short-term move in the market was notable.
Rate Cuts and the Market
For context, the downside of rate cuts is they normally indicate a recession is coming. The chart below shows the 2-year and 10-year rates in the U.S. since 1980 and corresponding recessions. Will the same trend follow this time around?
The recession concern is important for the Asymmetric Portfolio because it’s caused concern about the overvaluation of some high-flying stocks. $NVIDIA Corp(NVDA)$ $Adobe(ADBE)$ $Visa(V)$ are just a few of the stocks that dropped this week despite the market rising. Meanwhile, value plays like oil stocks were up and bank stocks rose.
I’ve stressed on the Asymmetric Portfolio that I want to buy great companies, but I also want to pay an attractive price. NVIDIA trading for 30x or 40x sales isn’t an attractive price, no matter how amazing the business is.
I would rather buy $General Motors(GM)$ at 5x earnings and get Cruise’s upside for free.
Or $Spotify Technology S.A.(SPOT)$ when the market had left it for dead.
Or buy $Celsius Holdings, Inc.(CELH)$ when it’s trading for 30x earnings and still growing.
Even $On Holding AG(ONON)$ was relatively inexpensive when I was buying, despite expecting to grow around 30% per year for the foreseeable future.
Some of the moves last week were a flight away from hype to stocks that looked like a value. That trend will be good for the Asymmetric Portfolio if it continues.
Short and sweet. I’ll be back with more next week.
https://asymmetric-investing.beehiiv.com/p/we-are-so-back
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