BY SUZANNE HAZLETT, MBA, CIMA®, CFP®
With evidence showing inflation is progressing towards its stated 2% target, the Federal Reserve (Fed) could consider cutting rates as soon as September’s FOMC meeting.
Here are some key takeaways following the July 2024 FOMC meeting:
The Fed elected not to raise or lower the federal funds rate.
With more evidence that the Fed will cut interest rates, economically sensitive areas of the economy such as small-caps, technology, consumer discretionary, and industrials have gained.
Bond valuations continue to increase due to the prospect of the Fed cutting interest rates.
So, how should investors prepare?
Seasoned investors with diversified portfolios and a focus on the long term know it isn’t prudent to make significant changes just because the Fed’s policy approach is evolving. Yet, if rebalancing your portfolio is appropriate, certain market areas and sectors have historically performed better in lower-rate environments.
GROWTH STOCKS A decline in borrowing costs can positively affect growth stocks, reducing the interest companies pay on loans and increasing future earnings potential. Investors seeking high-quality growth stocks may want to focus on the technology and communication services sectors.
REAL ESTATE Lower borrowing costs also benefit the real estate sector. When interest rates rise, the cost of borrowing increases, leading to higher interest expenses for REITs (Real Estate Investment Trusts), squeezing profit margins, and reducing the funds available to reward shareholders. Lower borrowing costs can increase profitability and improve cash flow, benefiting investors with increased potential for appreciation and higher dividends.
SMALL-CAPS Publicly traded small companies, or small-caps, are another asset class that tends to do well when interest rates are lower. Small-caps are inherently more sensitive to interest rates than their larger counterparts since smaller companies borrow more outside funds to support their growth.
Investors should always take a comprehensive view of their portfolio and the economy in general before making any significant changes to their investment strategy.
Suzanne Hazlett, MBA, CIMA®, CFP®, is a Certified Investment Management Analyst® and CERTIFIED FINANCIAL PLANNERTM professional. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Securities are offered through Raymond James Financial Services, Inc., member FINRA/SIPC. All investments bear risk of principal loss. Past results are no guarantee of future performance. HAZLETT WEALTH MANAGEMENT, LLC is independent of Raymond James and is not a registered broker/dealer. 675 Sun Valley Road, Suite J1 + J2, Ketchum, Idaho, 83340 208.726.0605 HazlettWealthManagement.com
