Weekly Buzz: The Fed’s rate cuts are coming. Here’s what it means for your money

Right now, everyone in the market is talking about one thing: interest rate cuts next year from the Federal Reserve (the Fed). After all, the Fed’s now hinting at the possibility of three interest rate reductions in 2024, and that’s got investors thinking there could be even more. Either way, it’s a huge deal: falling interest rates tend to boost stock prices, especially for growth companies that depend on future earnings.

Markets are moving fast – last week, Wednesday saw the biggest asset rally on a Fed interest rate announcement day since the global financial crisis – but there may still be room for more gains. The last time the Fed began cutting interest rates (in 2019), the S&P 500 shot up by about 30% and investment-grade bonds gave a solid 9% return. And in the rare instance of a soft-landing scenario (when an interest rate hiking series has managed to bring down inflation without triggering a recession), the S&P 500 has jumped an average of 15% in the year following the first rate cut, according to data that goes back to 1965. So the big question is: what does this all mean for your money?

Here are three takeaways for your portfolio

1. Rekindle your love for fixed income and resist the temptation of cash. Keeping too much of your portfolio in cash could chip away at your potential returns, especially if you believe in deeper than anticipated central bank rate cuts. In that case, it may be a good time to think about locking in some still-decent bond yields. With inflation settling and the Fed seemingly calling a wrap on its interest rate hikes, bond yields probably have hit their peak. And that means they’ve got nowhere to go but down in 2024. You can check out our easy to use Passive Income template to get you started.

2. You may want to consider riskier assets with a longer term view – emerging markets in particular. The US dollar is likely to weaken as interest rates fall, bringing Treasury yields down with them. And that’s likely to boost emerging market economies and their stocks. India could be a standout play here because of its strong growth picture. In the US, meanwhile, laggards like small-caps, value stocks, REITS, lower-quality tech stocks, and high-yield bonds would benefit, assuming the US can continue to keep itself out of a recession.

3. Don’t doubt the persistence of the market’s robust rally. With interest rates at multi-decade highs, investors have stashed nearly $6 trillion in cash in money markets and short-term instruments. If borrowing costs decline in 2024, yields are likely to follow suit. This could channel a substantial portion of the $6 trillion in assets into stocks and other higher-risk investments, which could really boost the market.

This article was written in collaboration with Finimize.

Our Macro Outlook for 2024

As the market consensus shifts from expectations of recession to the narrative of a “soft landing”, our CIO Stephanie Leung shares our view on its likelihood - along with growth, inflation and all things returns for next year.  A 10 mins read is all you need to stay informed.

Weekly buzz will take a break next Friday, 29 December 2023. We'll be back in 2024, ready to share more with you. Until then, have a fantastic holiday season from all of us at StashAway.