The Fed signaled at its most recent Federal Open Market Committee (FOMC) meeting on March 19th and 20th that it would cut interest rates three times this year, but it is not clear when those cuts will occur.
According to the better-than-expected Consumer Price Index (CPI) released on March 12, inflation remained at 3.5% in March, falling short of the Fed's 2% target. There is a possibility that interest rate cuts may be delayed. So are certain investments still worth it?
Explore Next: How I Made $1,000 in a Month with Dividend Stocks
Check it out: 5 Genius Things All Rich People Do with Their Money
The Fed, which will hold its next FOMC meeting from April 30 to May 1, has already telegraphed that a rate cut could happen before the end of the year. Indeed, Chairman Jerome Powell said on April 16 that he sees “no further progress” in curbing inflation, and that gaining enough confidence to resume accommodative policy “may take longer than expected.” “Expensive,” he added, CNBC reported.
“Inflation is the only downside to the continuing strength of the U.S. economy,” Mark Zandi, chief economist at Moody's Analytics, said in an April 15 research note. “If the recent rebound in inflation continues, not only will the Fed not be able to cut rates anytime soon, but its next action will likely be to raise rates.”
Against this backdrop, experts said there are still investments worth considering before a rate cut occurs.
We'll also introduce you to 9 safe investments that offer high returns.
sponsor: Protect your wealth with a Gold IRA. Take advantage of gold's timeless appeal with a Gold IRA recommended by Sean Hannity.
US stocks
JPMorgan Chase — JPMorgan Chase, one of the largest banks in the U.S., is lowering interest rates because it can borrow money at lower interest rates, allowing it to offer more favorable loans and increase profitability. Michael Collins, Chartered Financial Analyst (CFA), said: Founder and CEO of WinCap Financial.
Additionally, Collins pointed out that Home Depot is a stock to watch. As interest rates fall, homeowners may be more likely to take out loans to renovate and improve their homes, which could benefit companies like Home Depot that sell building materials and home improvements. A product with character.
Collins also pointed out that Microsoft has strong financial fundamentals and consistent growth potential. On the other hand, lower interest rates could create favorable conditions for companies to invest in technology upgrades and software solutions, which could boost sales and profits.
Finally, Collins said Walt Disney's diverse portfolio and strong brand recognition make it a solid choice in this category.
“The entertainment industry tends to do well during periods of low interest rates because people may have more disposable income to spend on leisure activities,” he said.
See more: 10 valuable stocks that could become the next Apple or Amazon
small cap stocks
Peter Earle, senior economist at the American Institute for Economic Research, said rate cuts would have a more pronounced impact on small-cap stocks than mid- and large-cap stocks.
“Small businesses tend to have higher loan interest rates because they are more dependent on borrowing and the associated risks are higher, so lower interest rates tend to have a fairly positive impact,” he said.
Dr. Robert Johnson, CFA, Certified Alternative Investment Analyst (CAIA), Professor of Finance at Creighton University's Heider College of Business, and Chairman and CEO of Economic Index Associates also noted that small-cap stocks have historically performed significantly better. When Federal Reserve interest rates are falling.
For example, from 1966 to 2023, U.S. small-cap stocks returned 30.1% during expansionary monetary policy periods when interest rates were falling, but only 4% during restricted periods when interest rates were rising. he said.
Ministry of Finance
Like corporate bonds, government bonds benefit greatly from a lower interest rate environment. As Dan Lawwich, founder of Option University, put it, when bond yields fall, bond prices rise.
“If interest rates were to fall to 3%, it would be even more valuable to own government bonds at 5% today,” Rawich said, adding that bondholders who bought at high interest rates today would have higher-yielding assets than bond investors. He added that it means that he owns . The person who bought it today. Investors pay a higher price for this higher yield.
“So, like corporate bonds, government bonds could benefit significantly from lower interest rates,” he said.
Investment grade US bonds and corporate bonds:
This is also a smart move to make before interest rates drop, says Thomas Brock, CFA, CPA, and expert contributor to Annuity.org.
“Bond prices are inversely related to interest rates, and that relationship is most pronounced for bonds with relatively long durations,” Block said. “Investing in these products ahead of the rate cut policy could yield significant investment returns.”
Rawich said corporate bonds are interesting because not all companies that issue bonds are equal, and weaker companies with poorer balance sheets should offer much higher yields to investors who buy corporate bonds. It pointed out.
“At the other end of the spectrum, you have AAA-rated companies issuing top-quality corporate bonds,” he said. “Fees are much lower because of the quality. When the Fed lowers rates, all bonds benefit. When bond yields fall, prices rise, and all types of bonds benefit.” It will be.”
Real estate investment trust (REIT)
REITs (essentially mutual funds that buy real estate instead of stocks) provide portfolio diversification and are a great way to earn passive income.
Research shows that historically, REITs have outperformed both stocks and private real estate after the end of a Federal Reserve tightening cycle, said Abby McCarthy, senior vice president of investments at Narite. He said there was.
“We saw a glimpse of this in Q4 2023, when REIT total returns rebounded with strong performance as markets priced in a move towards a more accommodative period and the possibility of rate cuts,” he said. Stated.
McCarthy added that expectations for short-term interest rate cuts have waned recently and that REITs will be “reset” in 2024.
“Given their historical performance, we are optimistic that REITs will rebound if Fed policy becomes more accommodative and the timing of rate cuts becomes more certain,” he said.
GOBankingRates Details
This article originally appeared on GOBankingRates.com: 5 investments worth considering before interest rates fall to optimize your portfolio
