Year: 2024

(Bloomberg) — A gauge of Chinese stocks listed in Hong Kong swung to a gain in volatile trading as investors debated whether weaker macro data will prompt the government to bolster stimulus.

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The Hang Seng China Enterprises Index closed up 0.3% after earlier sliding as much as 1.3%. Property shares were among the biggest decliners, with a gauge of the sector dropping as much as 1.8%, while utility stocks rose. Mainland markets are shut until Wednesday for holidays.

Disappointing economic data over the weekend is adding pressure on the authorities to ramp up fiscal and monetary stimulus if the nation is to reach this year’s growth target. As deflation gets entrenched, investors are hoping the government will boost fiscal spending and or even try to directly help the consumer.

“Support from fiscal policy, which has lagged throughout 2024, could step up,” Wei He, an economist at Gavekal Research, wrote in a client note. “The government will probably introduce some additional stimulus measures in coming months.”

“Still, those measures are unlikely to convince market participants that nominal growth prospects are improving,” he said.

Failure to achieve the annual growth target may further undermine investor confidence, with overseas funds already pulling a record amount of money out of the country in the second quarter. A rebound in the nation’s equities earlier this year has lost momentum, with the CSI 300 Index closing at its lowest since 2019 last week. Declines may increase in absence of a forceful stimulus.

China’s central bank indicated late last week that it will step up its fight against deflation and prepare additional policies to revive the economy, after credit data showed private confidence remained weak despite previous interest-rate cuts. The nation is poised to cut interest rates on more than $5 trillion of outstanding mortgages as early as this month in a bid to spur consumption, Bloomberg News reported last week, citing people familiar with the matter.

“The recent Chinese economic data paints a grim picture, with key indicators missing expectations and signaling heightened uncertainty for China equities,” said Manish Bhargava, chief executive officer at Straits Investment Management.

While aggressive stimulus may offer a short-term boost to equities, the authorities’ incremental measures to date have raised “doubts about the potential scale and effectiveness of future intervention,” he said.

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Macro conditions in China have now turned so weak they are challenging the argument about owning Chinese equities due to their ultra-cheap valuations. The HSCEI currently trades at 7.1 times its 12-month forward earnings estimate, compared with its five-year average of 8.4 times, according to data compiled by Bloomberg.

Valuations look tempting, but “when you look at macro, it is not there,” Ecaterina Bigos, chief investment officer for Asia excluding Japan at AXA Investment Managers, said in a Bloomberg TV interview. “Macro elements are very weak across the board.”

Concern over slowing economic growth has seen investors pile into the nation’s sovereign debt, pushing 10-year yields to the lowest level since Bloomberg began tracking the data more than 20 years ago. Analysts have called for strong stimulus measures to help break this cycle.

Policymakers have a window to loosen monetary policy this month when the medium-term lending facility rate and liquidity decision both come due. All but two analysts surveyed by Bloomberg predict the central bank will keep the one-year policy rate at 2.3%, though some see a potential reduction in the reserve requirement ratio.

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Stocks managed to secure solid wins ahead of a critical monetary policy decision from the Federal Reserve, which has investors on edge over how aggressively the central bank will bring down interest rates.

The tech-heavy Nasdaq Composite (^IXIC) led markets higher to nab its best week of the year, up about 6%. That weekly best was echoed by the benchmark S&P 500 (^GSPC), which saw an uptick of 4% as both gauges notched their fifth straight day of gains on Friday. The Dow Jones Industrial Average (^DJI) also ended the week in the green, up around 3%.

The positive swings come as traders have flip-flopped on whether the Federal Reserve will cut rates by 25 basis points or opt for a more robust 50 basis point cut at the end of its two-day policy meeting on Wednesday. No matter the size, it will be the first rate cut from the Fed since early 2020.

Former New York Fed president Bill Dudley said there’s a “strong case” for a deeper cut as FOMC members attempt to maneuver a “soft landing” of the economy. That, along with reports from the Financial Times and the Wall Street Journal that suggested policymakers were struggling to come to a decision, have fueled expectations for a jumbo rate cut.

Outside of the Fed decision, investors will also be monitoring the health of the consumer, with retail sales for the month of August on the docket for Tuesday. The housing market will also be top of mind after mortgage rates dropped to their lowest level since February 2023.

A weekly update on jobless claims is also on the schedule, as well as activity checks from the manufacturing sector.

In corporate news, quarterly reports from FedEx (FDX), General Mills (GIS), Lennar Corporation (LEN), and Darden Restaurants (DRI) will headline the earnings calendar.

FedEx will be in particular focus, as earnings from the delivery conglomerate are often viewed as a bellwether for the state of the broader US economy.

The Fed’s big decision

The Fed will announce its next monetary policy decision on Wednesday. Markets are largely split on whether the central bank will cut rates by 25 basis points to a range of 5.0% to 5.25% or by 50 basis points to a range of 4.75% to 5.0%.

Friday saw a significant jump in expectations for a 50 basis point cut, according to the CME FedWatch Tool. As of Friday afternoon, traders had placed a roughly 49% probability policymakers would commit to that larger rate cut, compared to just a 28% chance one day prior.

There’s a case to be made for both. On the one hand, inflation has remained above the Federal Reserve’s 2% target on an annual basis with hotter-than-expected readings on monthly “core” inflation suggesting the Fed should err on the side of caution and cut by just 25 basis points.

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“With core inflation coming in higher than expected, the Fed’s path to a 50 basis point cut has become more complicated,” Seema Shah, chief global strategist at Principal Asset Management, wrote following Wednesday’s CPI report for the month of August.

“The number is certainly not an obstacle to policy action next week, but the hawks on the committee will likely seize on [the] CPI report as evidence that the last mile of inflation needs to be handled with care and caution — a formidable reason to default to a 25 basis points reduction.”

But other economic data points, including a jobs report that indicated a weakening labor market, suggest the central bank may already be behind the curve.

“We believe what the Fed should do next week is clear: recalibrate the policy rate 50bp lower to adjust for the shifting balance of risks,” JPMorgan economist Michael Feroli wrote in a note to clients on Friday. “What the FOMC will do is less clear, but we’re sticking with our call that they will do the ‘right’ thing and cut 50bp.”

Along with its policy announcement, the Fed will also release updated economic forecasts in its Summary of Economic Projections (SEP), including its “dot plot,” which maps out policymakers’ expectations for where interest rates could be headed in the future.

In June, Fed officials saw the fed funds rate peaking at 5.1% in 2024, suggesting just one 25 basis point cut to come this year. But the narrative has shifted quite considerably since that time. And with markets now pricing in 100 basis points’ worth of cuts through the end of 2024, Wednesday’s dot plot will show investors whether or not central bank leaders agree.

“Our baseline still assumes 25bp cuts at every other meeting, but the odds of a faster pace has increased given the Fed’s goal to prevent more weakness in the labor market,” Oxford Economics lead US economist Nancy Vanden Houten wrote on Friday.

Overall, stocks could turn volatile no matter which direction the Fed takes. That makes Fed Chair Jerome Powell’s post-decision press conference all the more important.

“Powell’s task at 2:30pm next Wednesday will very much depend on what the Committee chooses to do at 2:00pm,” Feroli said. “If it decides to cut 50bp, Powell will need to convey that the action is intended to support the outlook for sustained expansion in an environment of low inflation. If instead the FOMC opts for a 25bp cut he will need to indicate that the Fed stands ready to ease more aggressively on any sign of labor market softness.”

Consumer check

A fresh reading on retail sales will also be closely tracked on Tuesday as investors wait to see whether or not July’s robust rebound in sales can be sustained.

Economists expect that retail sales declined 0.2% in August from the prior month, which would mark a significant deceleration from the 1% sales growth surprise seen in July. Excluding gas and autos, expectations are for a 0.3% increase.

“The already-reported decline in vehicle sales will weigh on headline retail sales in August, but we anticipate a modest increase in core and control group sales, which will keep real consumption on track for a small gain in August,” Oxford Economics’ Vanden Houten said. “Real disposable incomes growth is proving resilient, and high-frequency indicators suggest consumer spending is continuing to steadily rise.”

She added, “There are still no signs that weakening in the jobs market is feeding through to slower growth in consumer spending.”

Weekly calendar

Monday

Economic data: Empire Manufacturing, September (-3.7 expected, -4.7 prior)

Earnings: No notable earnings

Tuesday:

Economic data: Retail sales, month over month, August (-0.2% expected, +1% previously); Retail sales ex-auto and gas, August (+0.3% expected, +0.4% previously); Industrial production, month over month, August (0.2% expected, -0.6% previously); Manufacturing (SIC) production, August (0.0% expected, -0.3% previously); NAHB Housing Market Index, September (41 expected, 39 previously)

Earnings: Ferguson Enterprises (FERG)

Wednesday

Economic data: Federal Reserve monetary policy decision (expected interest rate cut to range of 5.0% to 5.25% from range of 5.25% to 5.5%); MBA Mortgage Applications, week ending Sept. 13 (1.4% previously); Building permits month over month, August (+1.1% expected, -3.3% previously); Housing starts month over month, August (+5.8% expected, -6.8% previously)

Earnings: General Mills (GIS), Steelcase (SCS)

Thursday

Economic data: Initial jobless claims, week ending Sept. 14 (230,000 previously); Continuing claims, week ending Sept. 7 (1.85 million previously); Existing home sales month over month, August (-1.3% expected, 1.3% previously)

Earnings: FedEx (FDX), Lennar (LEN), Darden Restaurants (DRI), FactSet Research (FDS), Cracker Barrel (CBRL), Endava (DAVA), MillerKnoll (MLKN)

Friday

Economic data: No notable economic releases.

Earnings: Tamboran Resources Corporation (TBN)

Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.

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(Bloomberg) — The dollar weakened and bonds rose as traders prepared for the Federal Reserve to reduce interest rates, with the market divided on how big this week’s cut will be.

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Bloomberg’s dollar index slipped to the lowest in more than eight months, while expectations of a narrowing rate differential between the US and Japan boosted the yen. Treasuries extended their gains, with the yield on the policy-sensitive two-year note falling to the lowest since September 2022.

Stocks kicked off a crucial few days with muted moves, as S&P 500 futures kept to a narrow range. Apple Inc. dragged tech shares lower in the premarket as some analysis of iPhone 16 pre-orders suggested weaker demand. There was little reaction in markets to the news of a second assassination attempt on former President Donald Trump.

The start of a long-anticipated US easing cycle takes center stage this week, part of a 36-hour monetary roller coaster that includes policy decisions in Brazil, South Africa the UK and Japan. It’s come down to a virtual coin toss for traders on whether the Fed will go for a 25 or 50 basis-point cut.

“There has rarely been so much uncertainty over central bank intentions,” analysts at Edmond de Rothschild wrote in a note. “They are caught between signs of economic weakness and inflation which is stubbornly resisting a return to the 2% target.”

For Joyce Chang, chair of global research at JPMorgan, the Fed has scope to make the bigger move and doing more now would probably send the right signal.

“We are still sticking with a 50 basis-point call, but it is a debate, internally and within the broader market,” Chang said on Bloomberg TV. “When I talk to investors, 25 versus 50 isn’t so much the debate, but really how does the US growth story look.”

That view was echoed by top Wall Street strategists, who suggested that the health of the US economy could have more bearing on stocks than the size of the Fed’s rate cut.

“If the labor data weaken from here, markets can trade with a risk-off tone regardless of whether the Fed’s first move is 25 or 50 basis points,” Morgan Stanley’s Mike Wilson wrote in a note. On the other hand, if jobs were to strengthen, a series of 25 basis-point reductions into mid-2025 could prop up equity valuations further, he said.

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Forecasters at Goldman Sachs Group Inc. and JPMorgan Chase & Co. also warned that rates alone were less important for stocks, given the uncertain outlook for the economy.

The Bank of Japan, meanwhile, is expected to keep rates on hold after roiling global financial markets with an increase at its last meeting.

“The communication from the BOJ will be critical to let market participants know exactly, as clear as they can be, what the next move and the particular timings of the next moves will be,” Katrina Ell, director of economic research Moody’s Analytics, told Bloomberg Television.

Trump is safe after his Secret Service detail opened fire at a man who was wielding an assault rifle at his West Palm Beach, Florida, golf course Sunday, in what the Federal Bureau of Investigation called an apparent assassination attempt.

According to law enforcement officials, Secret Service officers clearing the golf course ahead of Trump spotted a man in the woods with a gun. The suspect — later identified as 58-year-old Ryan Routh, according to federal officials who requested anonymity to discuss an ongoing investigation — fled in a black car but was later detained after a chase.

In Asia, a string of poor Chinese data left traders wondering if authorities would initiate forceful stimulus to buttress the economy. Factory output, consumption and investment all slowed more than forecast for August, while the jobless rate unexpectedly hit a six-month high.

Markets in Japan, South Korea and mainland China were closed for a holiday.

In commodities, gold rose to a fresh record high as markets waited for the Fed easing. Elsewhere, oil steadied after its first weekly gain in a month as a drop in Libyan exports was offset by China’s economic woes.

Key events this week:

• ECB speakers including Vice President Luis de Guindos and chief economist Philip Lane, Monday

• US empire manufacturing, Monday

• Singapore trade, Tuesday

• Federal Reserve begins two-day meeting, Tuesday

• US business inventories, industrial production, retail sales, Tuesday

• Canada CPI, Tuesday

• Indonesia rate decision, Wednesday

• South Africa retail sales, CPI, Wednesday

• UK CPI, Wednesday

• Eurozone CPI, Wednesday

• US rate decision, Wednesday

• Brazil rate decision, Wednesday

• Australia unemployment, Thursday

• New Zealand GDP, Thursday

• Taiwan rate decision, Thursday

• Norway rate decision, Thursday

• UK rate decision, Thursday

• South Africa rate decision, Thursday

• China loan prime rates, Friday

• Japan CPI, interest rate decision, Friday

• ECB President Christine Lagarde speaks, Friday

• Bank of Canada Governor Tiff Macklem speaks, Friday

Some of the main moves in markets:

Stocks

• S&P 500 futures were little changed as of 7:34 a.m. New York time

• Nasdaq 100 futures fell 0.4%

• Futures on the Dow Jones Industrial Average rose 0.2%

• The Stoxx Europe 600 was little changed

• The MSCI World Index was little changed

Currencies

• The Bloomberg Dollar Spot Index fell 0.3%

• The euro rose 0.4% to $1.1122

• The British pound rose 0.6% to $1.3197

• The Japanese yen rose 0.5% to 140.09 per dollar

Cryptocurrencies

• Bitcoin fell 1.8% to $58,740.14

• Ether fell 2.4% to $2,306.92

Bonds

• The yield on 10-year Treasuries was little changed at 3.64%

• Germany’s 10-year yield was little changed at 2.14%

• Britain’s 10-year yield was little changed at 3.77%

Commodities

• West Texas Intermediate crude rose 1% to $69.36 a barrel

• Spot gold rose 0.1% to $2,581.42 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Matthew Burgess, Sujata Rao, Catherine Bosley and Sagarika Jaisinghani.

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©2024 Bloomberg L.P.

Choosing your Social Security filing age is perhaps the most important retirement decision you’ll make, as it can affect your benefit amount by hundreds of dollars per month.

You can begin claiming as early as age 62, but that comes at a steep price: a permanent benefit reduction of up to 30%. Waiting until age 70 will earn you the maximum possible payments based on your work history, with a bonus of at least 24% on top of your full benefit.

Despite the reduction in benefits, 62 is one of the most popular filing ages. According to 2023 data from the Social Security Administration, roughly one-quarter of both men and women file at 62, while fewer than one in 10 wait until age 70.

When it comes to the ideal age to take Social Security, though, the data is clear: Age 70 is far and away the best time for the majority of retirees. While the data is compelling, here’s why that may not be the best move for your retirement.

Research shows filing at 70 is a no-brainer

Taking Social Security benefits at age 70 can maximize your monthly income, sometimes increasing your benefit amount by several hundred dollars per month. But for most older adults, it can maximize your lifetime income, too.

In a 2019 report from United Income, researchers used data from the Social Security Administration to examine retirees’ claiming decisions and how those decisions affected their lifetime income. They then determined how many retirees made the ideal claiming choice to maximize their income and at what age older adults should file to earn as much as possible.

They found that claiming before age 64 is the ideal choice for only 6.5% of retirees, while a whopping 57% could have earned more in total by filing at age 70. Furthermore, filing at a less-than-optimal age costs the average retired household around $111,000 in total income over a lifetime.

A separate, similar study from the National Bureau of Economic Research found that a staggering 99.4% of retired households could maximize their lifetime income by waiting until at least age 65 to file, while 91.6% would be best off financially by claiming at age 70.

Additionally, the study revealed that for those aged 55 to 62, specifically, claiming Social Security at the financially optimal age could result in lifetime gains of around $181,623.

When it pays to take benefits sooner

The data may be clear that taking benefits at 70 can maximize your total lifetime income. However, finances are only one part of the equation when it comes to deciding on a filing age. Other factors, like health and marital status, can play an equally important role in this decision.

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If your health takes a turn for the worse in your 70s, filing for benefits sooner could give you more time to enjoy retirement. Nobody can predict the future, of course, but life can throw curveballs in an instant. Filing early will reduce your monthly payments, but it could also help you make the most of every moment in case the unthinkable happens.

Also, if you’re married to someone who is also entitled to Social Security, it can be a good idea to coordinate your claiming ages. For example, one person may wait until age 70 to earn the maximum payment, while the other files at 62 to make it a little more affordable to retire early.

Finally, filing early can be a smart option if you’re on the fence about when to claim. If you change your mind within 12 months of taking benefits, you can withdraw your application and file again later. But if you delay benefits from the start and regret your decision, you can’t go back in time for a do-over.

No matter your situation, finances will play only one part in your decision. If your primary goal is to earn as much as possible in retirement, delaying claiming until age 70 is likely your best bet. But if you’re aiming to retire earlier for health reasons or otherwise, it sometimes pays to file early. You may need to make some financial sacrifices, but there’s more to retirement than just money.

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Research Shows Most People Should Take Social Security at 70. Here’s Why That May Not Be the Best Move. was originally published by The Motley Fool

The S&P 500 has delivered outstanding returns over the last year and is currently up around 23%. However, the index has returned an average annual return of about 10% going back decades, so if you want to find market-beating stocks, you need to look for companies that can sustain high double-digit growth for several years.

The artificial intelligence (AI) market is a promising field to look for growth stocks. Statista estimates spending on AI technology to increase from $184 billion this year to $826 billion by 2030.

Here are two AI stocks that have crushed the S&P 500 over the last year and can outpace the index through the end of the decade.

1. Palantir Technologies

Shares of Palantir Technologies (NYSE: PLTR) have soared to new highs as the AI software provider reported accelerating growth this year. The company has primarily depended on government deals. However, it’s starting to see an increasing number of corporations invest in its software, which could catapult the stock to market-crushing returns over the next six years.

In the second quarter, Palantir reported a robust 27% year-over-year increase in total revenue. The company closed 10 deals worth more than $10 million. These results are impressive, considering the headwinds many software companies are experiencing this year due to tightening enterprise spending.

Companies seem to be prioritizing investment in AI. After using Palantir, these companies are seeing positive returns, such as faster completion of tasks and better price optimization for products, which can help a business boost profit margins.

An important advantage for Palantir is the use of its software engineers as part of the sales process. The engineers work with customers to set up the software and show them ways to get more out of it. This gives Palantir an enormous advantage in driving higher sales from customers.

Palantir’s high-margin software business should create outstanding shareholder returns in the coming years. Wall Street analysts are projecting Palantir’s annualized earnings to grow 85% over the next five years, which implies a substantial increase in the company’s margins. There will be ups and downs, but investors should expect Palantir stock to at least double in value from current share prices by 2030 and outperform the market averages.

2. Nvidia

Nvidia (NASDAQ: NVDA) is estimated to control at least 70% of the AI chip market. It has long dominated the market for graphics processing units (GPUs), which have the processing bandwidth to handle the demands of AI training. Nvidia’s lead in GPUs has translated to phenomenal returns for shareholders in recent years as companies continue to invest in building more data centers.

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Nvidia’s data center revenue more than doubled year over year last quarter to $26 billion, and the expanding opportunities beyond the U.S. should allow the company to maintain its momentum into next year. While it prepares to launch the next-generation Blackwell AI computing platform, management also continues to emphasize the burgeoning opportunity to supply AI infrastructure for countries worldwide.

Foreign nations want to use their own language and culture with generative AI tools, and they are turning to Nvidia to help them build the infrastructure to make this happen. For example, Japan’s National Institute of Advanced Industrial Science and Technology uses thousands of Nvidia H200 GPUs for its AI Bridging Cloud Infrastructure 3.0 supercomputer.

While Nvidia continues to cash in on the enterprise wave, sovereign AI infrastructure could be the next tidal wave that creates significant growth opportunities for the GPU leader. Management believes its sovereign AI business will surpass $10 billion this year.

Nvidia’s share price has soared 160% over the last year, but that has been completely driven by its data center growth. The stock still trades at an attractive forward price-to-earnings ratio of 29 using next year’s consensus earnings estimates. With analysts forecasting annualized earnings growth of 52% over the next five years, Nvidia stock could significantly outpace the return of the average stock.

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2 AI Stocks That Can Crush the S&P 500 Through 2030 was originally published by The Motley Fool

For the better part of the last two years, it’s been all systems go for bulls on Wall Street. Since the start of 2023, the iconic Dow Jones Industrial Average (DJINDICES: ^DJI), benchmark S&P 500 (SNPINDEX: ^GSPC), and growth stock-powered Nasdaq Composite (NASDAQINDEX: ^IXIC) are higher by 25%, 47%, and 69%, respectively, as of the closing bell on Sept. 13, 2024, and have all hit multiple record-closing highs this year.

While there’s little question that a resilient U.S. economy, along with investor euphoria surrounding artificial intelligence (AI) and stock splits, have driven equities higher, it’s important to understand that stocks can and do move in both directions.

According to investing great Warren Buffett, “Be fearful when others are greedy. Be greedy when others are fearful.” The time to be fearful has officially arrived for Wall Street and investors.

The Federal Reserve is about to cut interest rates, and that’s historically bad news for stocks

On the surface, things appear to be going swimmingly for the U.S. economy. Gross domestic product is expanding, the unemployment rate is still near historic lows, and the prevailing rate of inflation is inching closer to the Federal Reserve’s long-term target of 2%.

But logic doesn’t always play out as you’d expect on Wall Street.

On the surface, a rising-rate environment would be viewed as bad for businesses and economic growth since it makes borrowing costlier. Conversely, a rate-easing cycle is typically seen as a positive for companies, with lower rates reducing the cost to service debt. But if you take a step back and look at the bigger picture, you’ll often find that the reaction of stocks is opposite to this thought process.

The nation’s central bank doesn’t alter monetary policy on a whim. It typically does so in response to changes in a multitude of economic data points. When the Fed raised its federal funds rate by 525 basis points beginning in March 2022, it did so to keep the U.S. inflation rate from getting out of hand with the U.S. economy firing on all cylinders.

On the other hand, rate-easing cycles are often undertaken by the Fed when one or more data points are amiss with the U.S. economy. The Federal Open Market Committee is widely expected to reduce its federal funds target rate when it meets later this week.

Since this century began, the Federal Reserve has kicked off three rate-easing cycles. Following the start of each cycle, the Dow, S&P 500, and Nasdaq Composite have swooned.

• Jan. 3, 2001: Beginning in early 2001, the nation’s central bank began a roughly 11-month easing cycle that moved the federal funds rate from 6.5% to 1.75%. Unfortunately, equities didn’t find a bottom during the dot-com bubble until Oct. 9, 2002, some 645 calendar days later.

• Sept. 18, 2007: With the financial crisis taking shape, the Fed began cutting rates on Sept. 18, 2007. Despite reducing the federal funds rate from 5% to a historically low range of 0%-0.25%, the stock market didn’t bottom until March 9, 2009, which is 538 calendar days after the first rate cut.

• July 31, 2019: The third rate-easing cycle began shortly before the COVID-19 pandemic took hold. The fed funds rate was quickly chopped from a range of 2%-2.25% to, once again, a historically low range of 0%-0.25%. A total of 236 calendar days elapsed from the first rate cut to market bottom.

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During the above rate-easing cycles, the benchmark S&P 500 endured three bear markets that resulted in respective losses of 49%, 57%, and 33% of its value, with the growth-fueled Nasdaq being hit even harder.

What’s more, since this century began, it’s taken an average — I repeat, an average — of 473 calendar days (roughly 15.5 months) following an initial rate cut for the stock market to find its bottom.

Rate-hiking cycles have a history of front-running recessions

In addition to rate-easing cycles leading to poor results for Wall Street, rate-hiking cycles have usually front-run downturns in the U.S. economy.

As you can see in the table below, the nation’s central bank has overseen 13 rate-hiking cycles over the last 70 years.

Data source: Board of Governors of the Federal Reserve. Table by author.

The standout data point from the above table is that 10 of the previous 12 rate-hiking cycles were followed by a U.S. recession. The only exceptions were two increases of 3.1 percentage points in the fed funds rate in 1982-1984 and 1993-1995.

Put another way, any increase above 310 basis points in the federal funds target rate by the Fed since 1954 has eventually (key word!) been followed by a recession. The latest rate-hiking cycle saw the nation’s central bank hike by 525 basis points.

Although the stock market and the U.S. economy aren’t linked at the hip, a shrinking economy does have a strong tendency to adversely impact stock valuations. If the unemployment rate rises and economic activity slows, it’s eventually going to translate into weaker earnings growth, if not a profit plunge, for corporate America.

Historically speaking, roughly two-thirds of the S&P 500’s drawdowns since 1929 have occurred during, not prior to, a U.S. recession.

Be fearful when others are greedy, but maintain perspective

While nothing is guaranteed on Wall Street, the historic correlation between the stock market and rate-hiking/rate-easing cycles would appear to point to meaningful downside to come for equities. Tack on the fact that the stock market has been this pricey on only two other occasions since January 1871, and you have a strong case that a bear market awaits.

Although having a healthy cash position at the ready to take advantage of eventual price dislocations can be a smart move, it’s important to maintain perspective if you’re a long-term investor.

For example, as much as working Americans and investors might dislike recessions, they’re ultimately a normal and inevitable part of the economic cycle. More importantly, they’ve historically resolved quickly. Out of the 12 recessions since the end of World War II, only three lasted at least 12 months, and none surpassed 18 months.

Comparatively, most economic expansions have endured multiple years, with two periods of growth surpassing 10 years. There’s little doubt that optimists have spent far more time in the sun than under gray clouds over the last eight decades.

This same non-linearity to cycles is seen in the stock market.

In June 2023, when the S&P 500 was confirmed to be in a new bull market, the researchers at Bespoke Investment Group released the data set you see above on X, the social platform formerly known as Twitter. Bespoke calculated the calendar-day length of every bear and bull market in the S&P 500, dating back to the start of the Great Depression in September 1929.

Based on Bespoke’s analysis, the average bear market for the S&P 500 has lasted only 286 calendar days, or about 9.5 months, over a 94-year stretch. On the other hand, the typical S&P 500 bull market has endured for 1,011 calendar days, or 3.5 times as long.

You’ll also note that close to half (13 out of 27) of the S&P 500 bull markets have lasted longer than the lengthiest bear market, which stuck around for 630 calendar days, from Jan. 11, 1973, to Oct. 3, 1974.

Although history is quite clear that notable downside is expected for the Dow Jones, S&P 500, and Nasdaq Composite, it’s important to maintain perspective and take a wide-lens approach. Over time, optimism eventually wins out on Wall Street.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The Fed Is Set to Cut Interest Rates — the Time to Be Fearful When Others Are Greedy Has Arrived was originally published by The Motley Fool

If you’ve ever wondered why professional and everyday investors pay such close attention to what stocks Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett is buying and selling, look no further than his track record. Since taking over as CEO in the mid-1960s, he’s presided over an aggregate return in his company’s Class A shares of almost 5,470,000%, as of the closing bell on Sept. 12.

The Oracle of Omaha’s “recipe” for success has involved buying time-tested businesses with sustainable competitive advantages and hanging onto these investments for extended periods. Core holdings Coca-Cola and American Express, which Buffett’s company has owned since 1988 and 1991, respectively, are perfect examples of brand-name businesses with sustainable moats.

However, dividend stocks have played an equally important role in Buffett’s long-term success. Companies that regularly share a percentage of their profits with investors tend to be profitable on a recurring basis and time-tested.

More importantly, dividend stocks have demonstrably outperformed non-payers over the last half-century. In The Power of Dividends: Past, Present, and Future, the investment advisors at Hartford Funds note that dividend stocks more than doubled up the average annual return of non-payers over the last 50 years (1973-2023): 9.17% vs. 4.27%.

Based on Berkshire Hathaway’s existing portfolio, Buffett and his investment team should oversee the collection of well over $5 billion in dividend income over the next 12 months. But most of this dividend income can be traced back to just a few top holdings.

Although Bank of America (NYSE: BAC) had been Buffett’s top dividend stock, his recent selling activity in the money-center bank has allowed another income stock to take this honor.

Move over, Bank of America: You’re no longer Warren Buffett’s top dividend stock

On July 24, roughly four weeks after the latest round of annual stress tests by the Federal Reserve were published, Bank of America’s board announced plans to increase its quarterly payout by 8% to $0.26 per share, as well as return as much as $25 billion to its shareholders via buybacks. With Berkshire entering the third quarter with more than 1.03 billion shares of BofA in its portfolio, this position alone would have delivered north of $1.07 billion in dividend income over the coming 12 months.

But on July 17, the Oracle of Omaha began hitting the brakes on Bank of America stock and pretty much hasn’t stopped since then. Between July 17 and Sept. 10, a span of 39 trading days, Buffett has been a seller of BofA stock in 27 of these sessions. All told, Berkshire’s stake in Buffett’s once-favorite bank stock has been reduced by close to 174 million shares, as of this writing.

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One possible reason behind this selling is Buffett’s desire to lock in gains ahead of an expected rate-easing cycle by the nation’s central bank. No money-center bank is more interest-sensitive than Bank of America. When interest rates decline, its net interest income will feel the pinch more than other large banks.

Buffett might also be selling for tax purposes. He proclaimed during Berkshire Hathaway’s annual shareholder meeting in early May that it’s likely corporate tax rates head higher. Thus, locking in sizable unrealized gains now will, in hindsight, be a smart move.

It’s also possible the Oracle of Omaha simply wants little to do with a historically pricey stock market.

Regardless of the reasons behind his active selling in BofA stock, Berkshire Hathaway still held 858,180,506 shares, as of the closing bell on Sept. 10. With Bank of America doling out a base annual payout of $1.04 per share, this stake would yield a hearty $892,507,726 in dividend income over the next 12 months, assuming no more selling activity.

But $892.5 million isn’t good enough to take the top spot among dividend stocks in Warren Buffett’s portfolio.

The Oracle of Omaha’s top dividend stock will generate almost $904 million each year

The latest round of selling in BofA has vaulted one of Buffett’s favorite stocks to buy over the last two-plus years, energy juggernaut Occidental Petroleum (NYSE: OXY), on to the pedestal in terms of dividend income.

Since 2022 began, Berkshire’s brightest minds have purchased 255,281,524 shares of oil and gas stock Occidental. With Occidental dishing out a $0.22-per-share dividend each quarter, Buffett’s common stock position is expected to generate $224,647,741 in dividend income over the next 12 months.

However, Buffett’s company also holds $8.489 billion in Occidental Petroleum preferred stock that yields 8% annually. This works out to an additional $679,120,000 that, in combination with the income received from Berkshire’s common-stock stake in Occidental, increases the 12-month dividend “haul” to $903,767,741!

One of the primary reasons Buffett can’t stop buying shares of Occidental Petroleum is the belief that the spot price of oil will remain elevated or head even higher. In addition to being an in-demand global resource, the supply of crude oil has been constrained by Russia’s invasion of Ukraine and multiple years of reduced capital spending by global energy majors during the COVID-19 pandemic. When the supply of a key commodity is tight, it’s not uncommon for its price to receive a boost.

Although a higher spot price for crude oil helps all drillers, it’s an outsized positive for Occidental, which generates the lion’s share of its revenue from its upstream drilling operations. If the price of oil rises, Occidental enjoys a greater increase to its operating cash flow than other integrated energy companies. Just be warned that the opposite holds true, too. If the spot price of crude oil declines, Occidental’s operating cash flow can take it on the chin more than other integrated oil and gas operators.

Furthermore, Berkshire Hathaway holds warrants to 83,858,848.81 common shares of Occidental stock that can be exercised at $59.624 per share. It’s in Buffett’s and Berkshire’s best interest that Occidental’s share price remains above this exercise price.

In mid-2017, the Oracle of Omaha exercised warrants to purchase 700 million shares of BofA at just $7.14 per share. When executed, Bank of America’s stock was trading in the neighborhood of $24 per share, which led to a sizable gain for Buffett and his company. He’d love for a repeat of this success with Occidental.

But even if these warrants aren’t exercised, it doesn’t change the fact that Occidental Petroleum is now Warren Buffett’s top dividend stock.

Should you invest $1,000 in Occidental Petroleum right now?

Before you buy stock in Occidental Petroleum, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Occidental Petroleum wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $729,857!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 9, 2024

American Express and Bank of America are advertising partners of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America. The Motley Fool has positions in and recommends Bank of America and Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.

Move Over, Bank of America! You’re No Longer Warren Buffett’s Top Dividend Stock — This Company Is… was originally published by The Motley Fool

Warren Buffett follows a routine. He gets plenty of sleep each night. He wakes up at the same time each morning. He drinks a can of Coca-Cola to kick off the day. He reads voraciously, including newspapers and companies’ financial reports.

But Buffett is now doing something for the first time in 20 years. And it could be concerning to many investors.

Hoarding cash

It’s not unusual for Buffett to keep a large amount of cash on hand for Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B). The company’s policy is to maintain at least $30 billion in cash, cash equivalents, and U.S. Treasuries.

However, Buffett is currently hoarding cash like never before. Berkshire’s cash position, including cash equivalents and short-term investments, totaled nearly $277 billion as of June 30. That’s the highest level ever.

Granted, Berkshire Hathaway is generating greater earnings than it has in the past. It has more money to sock away. Also, inflation has eroded the buying power of the U.S. dollar so a larger cash position makes sense to some extent.

But there’s another sign that Buffett’s current level of cash stockpiling is unusual. Berkshire’s cash position has increased more than 65% so far in 2024. It grew over 30% in 2023. The last time the conglomerate’s cash, cash equivalents, and U.S. Treasuries rose by 30% or more in back-to-back years was in 2003 and 2004.

Time to worry?

It’s not hard to figure out why Buffett is holding on to so much cash. He prefers to be more heavily invested in stocks but will buy stocks only when they’re attractively valued. The fact that Buffett has built Berkshire’s cash position to such a large level reflects his belief that most stocks are not valued attractively.

Buffett is almost certainly right that many stocks trade at a premium. One of his favorite valuation metrics, known as the Buffett indicator — the ratio of the total U.S. stock market value divided by GDP — is near its all-time high. In 2001, Buffett wrote in a Fortune essay, “[N]early two years ago the ratio rose to an unprecedented level. That should have been a very strong warning signal.”

Should investors worry? I think that’s too strong of a word to use. Buffett’s increase in Berkshire’s cash position by 30% or more in back-to-back years two decades ago didn’t lead to a near-term market meltdown. The S&P 500 rose over the next two years.

Also, the Buffett indicator is arguably less useful now than it was in the past, with technological innovations making it more challenging to accurately assess what their valuations should be. We should note as well that Buffett is still buying some stocks in the current environment.

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Follow Buffett’s lead

I think the best thing for investors to do right now is to follow Buffett’s lead. When you find stocks of well-run companies that are available at a reasonable price, buy them. Build a solid cash position if you don’t already have one. Having plenty of dry powder on hand will enable you to buy stocks at a discount when the stock market inevitably pulls back.

Most importantly, maintain a long-term perspective. Buffett’s success is due in large part to his mindset. Thinking long-term is a part of his routine that every investor should adopt.

Should you invest $1,000 in Berkshire Hathaway right now?

Before you buy stock in Berkshire Hathaway, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Berkshire Hathaway wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $729,857!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 9, 2024

Keith Speights has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.

Warren Buffett Is Doing This for the 1st Time in 20 Years. Should Investors Be Worried? was originally published by The Motley Fool