🎙️ Not So Fast

The second interest rate cute is in the books.

The Federal Reserve approved a quarter-point cut on Thursday, the latest attempt to prevent large rate increases of the prior 2.5 years from further deteriorating the labor market as inflation abates.

The decision came the same week Donald Trump was elected to a second presidential term, which drove major markets higher. The new rate cut will bring the benchmark federal funds rate to a range between 4.5% and 4.75%.

That rate cut, combined with Trump’s election, powered the S&P 500 to yet another winning week in 2024 — the index briefly crossed 6,000 on Friday for the very first time.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Financial guru? Not so fast

• The big week for small stocks

This, and more, in just 5 minutes to read.

Chart(s) of the Day

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In The News

🤔 Financial Guru? Not So Fast

Stocks are soaring, and euphoria is very much in the air. Meanwhile, all kinds of investment advice have never been easier to come by. 

That can be a problem. And it arrives as some financial advisers use marketing tactics to appear trustworthy to attract clients. Yet some of them are misleading, which The Wall Street Journal’s Jason Zweig calls “trustwashing.”

• Tactics include displaying “As Seen On” badges with major TV network logos, buying ethical seals of approval from organizations like the National Ethics Association, even if the adviser has disciplinary issues, and claiming to be authors of books they only contributed a small chapter to.

All of the above makes it more difficult to identify trustworthy advisers. It’s part of the commercialization in the financial advice industry, which can be the Wild Wild West. Just ask Warren Buffett, who has long spoken out against the industry. "Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway,” he once said.

And, as Zweig suggests, it’s increasingly imperative in an age of information overload that investors be wary of surface-level trust indicators and do a more thorough vetting of both “gurus” and financial advisers' backgrounds and claims.

Zweig went a step further and examined 272 advisers who were allegedly vetted to be trustworthy. Yet he ultimately found that:

• seven who were fired amid allegations of misconduct,

• seven who were sanctioned by regulators for selling unregistered securities,

• three who have been barred for life from the securities industry,

• two whose state securities licenses have been revoked,

• two who filed for personal bankruptcy,

• one with nearly $200,000 in unpaid federal taxes.

Why it matters:

Many people get the bulk of their financial news from cable news networks like CNBC, which might not be in the best interest of investors because the incentive is for more viewership and advertising revenue, not necessarily sound investment advice. 

• Others get their financial news and advice from TikTok and Instagram, which could also be dangerous. One financial psychology professor said the one-size-fits-all approach inherent in popular videos on social media could be costly. “Young people are listening to financial advice that may be totally inappropriate,” he says. In other words, just because a reel has millions of vides doesn’t mean it’s sound advice for an individual.

Final thoughts: Zweig recommends asking potential advisers (or your current one) more detailed questions to verify their claims and credentials. 

“I’ve often written that the key to finding an adviser you can trust is to ask lots of questions,” Zweig adds. “The proliferation of trustwashing proves that you need to ask even more questions than ever: Can I see video clips of your network TV appearances? How much of that book did you write yourself? Did you pay a fee for that honor or award?”

He concludes: “It’s a shame that trust is for sale. Make sure your adviser earned it.”

Read more

More Headlines

🚗 How Elon Musk might be the biggest winner of the election

🙌 How Charlie Munger always kept things simple in business and life

🌍️ Climate tech stock market shares tumble after Trump's win

🗣️ Warren Buffett: Don’t mix politics with your investment decisions

🤖 Perplexity AI to raise $500 million round at $9 billion valuation

💰 World’s 10 richest people got a record $64 billion richer from Trump’s reelection

📈 Carlyle CEO expects dealmaking surge in 2025

💪 Behind the Big Week for Small Stocks

What a week — the small-cap craze is heating up. 

The Russell 2000 index of small-cap U.S. stocks got a boost from Donald Trump’s election this week, going for a ~9% gain, its largest weekly rise since June 2020. 

• Investors believe smaller companies will benefit from Trump’s policies, namely tax cuts and looser regulation. We’re in an “Everything Rally,” but small-caps, in particular, shined this week.

Earn baby, earn: Earnings didn’t hurt, either. Several Russell members beat expectations with quality earnings reports. It’s noteworthy outperformance because the index’s largest component, once-hot Super Micro Computer, has been extremely volatile. The server maker’s shares slid after its auditor resigned and a sales update disappointed investors. 

• Small-cap stocks have performed well this year, with the Russell 2000 up about 20%. 

Driving the trend: The index was hit hard in 2022 amid the Federal Reserve’s interest-rate campaign, but it’s trading at around 10 times forward median earnings, a lower valuation (by that metric) than the S&P 500, which is at about 17 times forward earnings.

• The current economic climate appears to be advantageous for smaller companies, which tend to be more responsive to overall market conditions. The Federal Reserve implemented another rate cut this week, a move that typically benefits companies with higher debt loads, such as small-cap firms. 

Why it matters:

Lower interest rates generally make borrowing less expensive, which can be particularly beneficial for smaller businesses that rely more heavily on debt financing.

Additionally, some market observers have suggested that a Republican victory could reduce corporate tax rates. Such a policy shift might prove especially beneficial for smaller enterprises, as they often have less capacity to navigate complex tax structures than their larger counterparts.

Plus, Trump’s tariffs will likely protect small-to-mid-sized U.S. companies focused on operating domestically, which could be another reason the Russell 2000 jumped after Trump won.

Broad view: Small caps are the latest corner of the market to rise, joining bitcoin, gold, financials, and the broader S&P 500, which has advanced nearly 27% year-to-date — one of its better performances ever through 10-plus months. 

Read more

Quick Poll

On Wednesday, we asked: Are you considering any changes to your equity portfolio because of Donald Trump's presidency? Why or why not?

— Most investors say the presidential election doesn’t impact their equity portfolio. “I am comfortable with my current equity portfolio, which is structured to align with my situation, values, and goals. Therefore, a change in the executive branch of the federal government has no impact on it.” Added one: “Over the long term, I believe in America over who is in the White House at any given time.”

— Another investor said, “Will possibly increase exposure to oil/gas and manufacturing.”

See you next time!

That's it for today on We Study Markets!

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