It's Time for Cuts

Easing off the Break

At 5.5%, interest rates are 'pressing the break' on financing, which slows down the economy. A small 0.25% interest rate cut would be "easing off the breaks." Not accelerating the gas pedal.

Debt growth is how the financial system finances economic growth. When interest rates are supportive, debt is cheaper, and financing accelerates across various sectors of the economy. This, in turn, enables the economy to increase the production of goods and services, leading to overall expansion.

However, the current interest rate environment is not supportive; it is highly restrictive. The cost of financing at 5.5% is well above the inflation rate at 2.5%. This indicates a highly restrictive monetary policy stance exerting downward pressure on economic growth and employment. A large portion of GDP is "wasting away" to pay interest instead of being directed towards expanding the economy, and if it is not expanding, it is contracting.

If rates are not cut soon, the economy faces an accelerated contraction. If this contraction gains momentum, businesses will be compelled to deleverage their debt, resulting in reduced revenues, lower profits, and job cuts to sustain operations.

Such economic strains would inevitably collapse consumer spending, forcing investors to sell assets to cover debts. Recognizing the potential risks, the Federal Reserve would likely intervene by easing monetary policy to prevent a further downturn and support economic stability.

It's time to cut rates, as the economy is at risk.

The Manufacturing Sector needs rate cuts to rise above 50.

Durable Goods Orders represent the demand for big-ticket items and demand is turning negative.

Retail Sales reveal a weakening consumer.

The Unemployment Rate shows the potential for further job loss

The inflation rate is no longer a threat.

Sectors that benefit from rate cuts

Banks have been under-owned and oversold and stand to gain the most upside from lower fed rates because most of their profits come from "borrowing short" and "lending long." If short rates are lowered, borrowing is cheaper, boosting margins and positively impacting earnings. Homebuilders will have cheaper financing and more demand in 2025, which will boost profits. IWM may be the best expression of this change in narrative.

IWM is a basket of interest rate-sensitive stocks; therefore, it has a lot more upside than SPY and QQQ.