The Fed’s Coming for Your Income
What would you do if your boss called you in and said he was slashing your salary by 30%?
You’d probably have a few choice words, spoken aloud or not. Then you’d begrudgingly accept… and probably start looking for a new job.
This is about to happen to the interest rate on your cash.
Only, there’s no way to find a new job in this scenario. Rich or poor, it’s happening to everyone.
So a lot of investors are about to start looking for larger profits… Especially Big Money.
If you have a chunk of cash in interest-bearing accounts, the solid return you’ve enjoyed the last few years is about to get hit… again.
Everyone expects the Federal Reserve to lower interest rates at next week’s meeting. According to CME’s FedWatch data, investors price in a…
- 0% chance that rates stay where they are (currently 4.25%-4.5%)
- 90% chance rates get lowered by 0.25%
- 8% chance of a 0.5% cut
That’s as lopsided as it gets.
The potential impact of lower interest rates is bigger than you might think – on cash, on how Big Money invests, and on the opportunities coming our way.
Beware Falling Returns
It all starts with the mind-blowing cash on the sidelines – a record $7.4 trillion in money market funds. (That doesn’t even include savings accounts, CDs, and other cash accounts.)
That $7.4 trillion mountain of moolah is bigger than the economies of every nation in the world except the U.S. and China.
You can see on the chart above how cash skyrocketed after Covid and as rates increased. As you probably remember, the Fed cut rates to basically zero during the pandemic. That led to rising inflation, and the Fed began its war on higher prices by raising rates in early 2022.
The federal funds rate, set by the Fed, shot up from 0% to a high of 5.25%–5.5% in a little over a year.
Yields on money markets and cash also rose. And while the peak return wasn’t anywhere near as beefy as what stocks did, a mostly risk-free 5% is still attractive for at least a part of your portfolio.
I say mostly risk-free because there is one big and obvious risk: falling interest rates.
Three cuts at the end of last year lowered rates to 4.25%-4.5%, a 20% haircut on cash. And now, cuts are set to resume.
Whether the Fed cuts rates next week or later, it’s clear they will come down. If we look at FedWatch data for December, investors assign a 64% probability that rates will end the year at 3.5%–3.75%. That’s a nearly 18% drop in money market yields in the next three months… and a 33.3% hit from two years ago.
I don’t think any of us would be satisfied making 30% less at our jobs… or 30% less on our investments.
I can assure you Big Money won’t be satisfied. They can’t be. There’s too much pressure to perform.
Higher rates hit stocks in 2022. The crowd sold and hid in money markets, and the pile of cash snowballed. We’re about to see a chunk of it melt in what could be a seismic shift back into stocks amid dwindling cash yields.
Big Money Is Already Investing for Lower Rates
I built my Quantum Edge system to spot the waves of Big Money flowing into the highest-quality stocks – and then ride those waves to big gains.
I can’t say with 100% certainty what the Fed will do next week, but thanks to the system’s ability to track institutional money flow, I can say with certainty that Big Money is already buying stocks that will benefit from lower interest rates.
Smaller companies get more bang for their buck with lower rates. They typically take on higher debt than large caps to finance growth. Debt becomes cheaper when rates fall, and the savings can accelerate earnings growth.
Small and mid-sized companies typically have bigger growth potential anyway, and lower interest rates help unlock that potential in the business and the share price.
Big Money is already buying small and mid-sized companies, and aggressively so. Much more than usual in these typically choppy months of August and September.
Since Aug. 1, Big Money buy signals (inflows) have outnumbered sell signals (outflows) by more than two to one. What’s more, 87.5% of those buys are small and mid-caps valued under $50 billion.
That’s a screenshot from my Quantum Edge system showing the actual breakdown of Big Money signals. Keep in mind these signals detect unusual activity – the telltale signs of institutions at work – not garden-variety buying and selling.
We see further confirmation in the small-cap Russell 2000 index, which has shot up more than 8% since Aug. 1 and outperformed the S&P 500 by 2.5x:
Notice how the Russell took off around Aug. 11. Why? Better-than-expected inflation data lifted expectations for a September rate cut, and Big Money responded.
Riding the Big Money Wave
With multiple potential catalysts in the coming weeks, investors should follow Big Money into the highest-quality stocks best positioned to profit from lower rates. Like smaller stocks, which is our focus in my Quantum Edge Pro service.
The key is finding the best companies with the strongest fundamentals and technicals whose shares are getting scooped up by Big Money.
One excellent example: The Bancorp (TBBK).
The Bancorp provides financial services for many fintech and payment apps. It issues cards, holds deposits, and makes specialized loans – essentially handling the banking part of business while companies focus on their customers.
Financial activity should pick up as rates fall, accelerating an already-strong business and stock. TBBK’s market cap is in the sweet spot at $3.5 billion, and its quant ratings are excellent with an overall Quantum Score of 93.9 and equally potent fundamentals and technicals.
And Big Money has had its sights on TBBK for a couple of months now. The Quantum Edge system picked up 13 unusual inflow signals (green bars) since July 7. TBBK has surged 26.5% in that time.
I recommended TBBK to my Quantum Edge Pro readers a little over four months ago. It was the second stock we added after the April 8 bottom, so there was lingering technical damage at the time.
But the fundamentals were solid then, too, and Big Money had been quite active in TBBK in the second half of 2024. Fifteen buy signals drove shares up 70% from the end of June through the end of November.
The technicals have recovered. Shares have hit multiple new highs over the last few months, and we’re now up nearly 60% in Quantum Edge Pro.
It was a good stock to buy near the depths because of its quality and Big Money activity, and the data tells us it’s likely to continue moving higher based on those same characteristics and helped by lower interest rates.
We’ve already seen stocks move as just a hint the Fed might cut rates. Smart investors can not only avoid getting hit with smaller returns on their cash, but also get in position to earn bigger profits in the wave of cash flowing into stocks.
The best way to ride that wave is in top-ranked stocks with muscular fundamentals (a great business), strong technicals (positive price action), and Big Money flowing in. That’s the quantum edge that works so well in any market, but especially in times like now when money is on the move.
Talk soon,
Jason Bodner
Editor, Quantum Edge Pro