Hello, YieldAlley readers! In this issue:

💳 American Express: An Empire of Plastic (Quartr)

👨‍💻 Why a surge in long-term unemployed workers is ringing alarm bells (CBS)

₿ Bitcoin soars past $120,000 as analysts predict new all-time high by end of year (Sherwood)

💸 20-Year Treasury Bonds At 5% Looks Attractive For Retirees (Financial Samurai)

🥇 Gold ETFs Capture a Record $9 Billion of Fresh Capital in September (Morningstar)

The Federal Reserve's decision to cut interest rates sends ripples through the entire financial system, affecting everything from your savings account to stock prices to the global economy. But the outcomes are rarely as straightforward as they might seem.

When the Fed cuts its benchmark interest rate, it's essentially making borrowing cheaper throughout the economy. Banks lower their lending rates, businesses can finance expansion more affordably, and consumers find credit cards and loans less expensive. The logic seems simple: cheaper money should stimulate economic activity, boost corporate earnings, and lift asset prices.

The most crucial factor isn't the rate cut itself—it's why the Fed is cutting rates in the first place.

Proactive cuts during economic expansions tend to work well. In 1995, the Fed implemented mid-cycle cuts while growth remained strong, and the S&P 500 surged 34% that year, followed by another 20% gain in 1996. Similarly, the 1998 cuts during the LTCM hedge fund crisis stabilized markets and set up impressive gains into 1999.

Reactive cuts, however, tell a different story. When the Fed cuts because economic trouble has already begun, the damage may already be done. During the 2000-2001 tech crash, the Fed slashed rates from 6.5% to 3.5%, yet the S&P 500 still fell 13% in 2001 and another 23% in 2002. The most dramatic example came during 2007-2009, when cuts began in September 2007 at 5.25% and ultimately dropped to near zero by December 2008. Markets didn't stabilize—the S&P 500 collapsed 38% in 2008, and the bottom didn't arrive until March 2009, nearly a year and a half after cuts began.

When rates fall, bond prices typically rise, but not all bonds benefit equally. The "belly" of the Treasury yield curve, bonds with 3 to 7 year maturities, often offers the best balance of income and protection during easing cycles. Meanwhile, money market and high-yield savings account rates historically decline in tandem with Fed cuts, making those previously attractive cash positions less compelling.

One important caveat: short-term rates tend to follow Fed policy closely, but longer-term rates don't always cooperate. They're influenced more by growth expectations, supply dynamics, and fiscal concerns. At the end of 2024, even as the Fed cut policy rates by 100 basis points, the average 30-year mortgage rate actually increased by 60 basis points, a reminder that different parts of the yield curve respond to different forces.

Lower discount rates make future earnings more valuable today, which typically benefits growth stocks, particularly in technology. These companies' valuations get a boost when the cost of money decreases.

However, the economic backdrop determines whether this potential translates into actual gains. If the economy avoids recession, growth stocks can rally strongly. But if rate cuts signal deteriorating conditions, even favorable valuations may not prevent declines.

Value stocks face similar conditional outcomes. While banks, industrials, and energy firms may benefit from improved demand and lower financing costs, their performance depends heavily on whether the economy maintains momentum. A soft landing supports value; recession fears undermine it.

Small-cap stocks present perhaps the most complicated picture. Despite the intuition that smaller companies should benefit most from cheaper borrowing, many small-cap indices contain high percentages of unprofitable companies. This quality issue makes them more vulnerable during economic weakness, even with falling rates.

Fed rate cuts often weaken the U.S. dollar, which can provide a tailwind for international equities. When dollar strength subsides, foreign investments become more attractive to U.S. investors and foreign assets gain in dollar terms.

Gold has historically performed well during Fed easing cycles, particularly when real rates fall and inflation remains elevated. On the higher-risk end of the spectrum, bitcoin has also tended to perform during past easing cycles, though with considerably more volatility.

The challenge for investors today is determining which type of rate-cutting cycle we're entering. Recent economic data shows concerning signs: job growth has slowed dramatically, unemployment has ticked higher to levels not seen since late 2021, and revisions to prior employment data have turned negative. These indicators suggest the Fed may be cutting reactively rather than proactively.

At the same time, recession indicators remain relatively benign. Lending standards have eased from restrictive levels, industrial production continues growing, and small business optimism has improved. This mixed picture makes the path forward uncertain.

Rate cuts are neither inherently good nor bad for markets. The real question is always whether the cuts arrive early enough to extend an expansion or whether they're coming too late to prevent a downturn.

History suggests that when the Fed cuts while the economy remains fundamentally healthy, markets typically respond positively across multiple asset classes. But when cuts represent emergency measures responding to deteriorating conditions, volatility and losses often follow before any eventual recovery.

For investors, this means looking beyond the rate decision itself to the underlying economic reality. Are labor markets stabilizing or weakening? Is consumer spending holding up? Are corporate earnings growing? The answers to these questions matter far more than the direction of interest rates alone.

Government Money Market Funds (7-Day Yields)

Brokered CD Rates (6-Month Rate)

ETFs (30-Day Yields)

Groupon is offering a Costco membership for $65 that includes a $100 credit toward online purchases, essentially giving you $35 in net value while getting access to Costco's bulk buying discounts. The timing works well for holiday shopping season, when it's easier to reach the $200 minimum purchase requirement needed to use the credit.

This offer reverses the traditional membership value proposition by front-loading immediate returns rather than requiring sustained purchasing behavior to justify the annual fee, the $100 Costco.com credit effectively creates a $35 net-positive value while forcing a $200+ online purchase that introduces new members to Costco's digital ecosystem. The math works decisively in the consumer's favor: even a single $200 order for household essentials delivers immediate savings before accounting for warehouse visits or potential Executive membership upgrades, while the 18-month lapsed-member eligibility creates churning opportunities for former subscribers. Key considerations include the November 9 credit expiration and October 27 purchase deadline creating compressed decision windows, plus exclusions that prevent gift card arbitrage or travel bookings, steering users toward core merchandise where Costco's unit economics shine. Strategic buyers should stack this with Costco.com-exclusive deals or bulk purchases that naturally exceed $200 (electronics, appliances, seasonal items), essentially securing wholesale pricing access while receiving purchasing power that would otherwise require $265 in retail spending, with even casual users likely breaking even within 3-4 months through strategic warehouse runs and disciplined shoppers potentially unlocking $500-1,000+ in annual savings through systematic bulk purchasing optimization.