How to Invest When the Fed Cuts Rates？Stocks & ETFs
In March 2022, the Fed started raising rates and seemed to successfully curb inflation, leading to a pause in hikes last July.
Recently, Chairman Powell indicated that it's time to adjust monetary policy. CME suggest a 71% chance of a 25-bps cut and a 29% chance of a 50-bps cut in September.
Observers believe that falling inflation and a weakening job market are driving the Fed to adjust policy. Experts think the Fed's new round of interest rate cut cycle is likely to be a relatively mild pre-interest rate cut, rather than a bailout for a serious recession or major external shock.
When interest rates inevitably start to fall, we can consider the following investments:
1.High-Yield Investments
Conservative, income-focused investors might lock in current high rates by buying certificates of deposit (CDs) or government bonds.
One-year CDs often offer APYs over 5%, and though funds are locked in, they typically offer better returns than savings accounts and protect principal from market drops. So, investors can consider high-rate CDs from banks like $Bank of America(BAC)$ or $Wells Fargo(WFC)$ .
Government bonds can be bought through brokerage accounts or directly via TreasuryDirect.gov, such as $iShares U.S. Treasury Bond ETF(GOVT)$ . As of now, six-month Treasury bills yield 5.3%, backed by the U.S. government. Long-term bonds fluctuate with rates but are considered very safe if held to maturity.
2.Bond ETFs
Bond ETFs, such as $iShares iBoxx $ Investment Grade Corporate Bond ETF(LQD)$ and $Vanguard Total Bond Market ETF(BND)$ , which invest in corporate or government bonds, tend to rise when rates fall.
After a tough few years due to rising rates, bond funds could see gains as cuts approach, offering a diversified investment option.
3.Preferred Stocks
Preferred stocks share similarities with bonds, often rising when rates fall. They trade like regular stocks but offer higher dividends and a senior claim in case of company bankruptcy.
They're considered a fixed-income investment, performing well when rates drop. $Invesco Preferred ETF(PGX)$ and $SPDR Bloomberg High Yield Bond ETF(JNK)$ are both doing well.
4. REITs
When rates fall, reliable, income-producing investments become valuable, benefiting high-quality REITs, including $Vanguard Real Estate ETF(VNQ)$ and $iShares Global REIT ETF(REET)$.
While not fixed-income securities, REITs pay dividends based on real estate income and generally rise when rates decline.
5.Homebuilder Stocks
High mortgage rates have kept many buyers on the sidelines. Lower rates could reduce the cost of buying and renovating homes, boosting demand. Homebuilders like $Toll Brothers(TOL)$ and $KB Home(KBH)$ should perform well, as will rental companies like $Invitation Homes Inc.(INVH)$.
Major home retailers like $Home Depot(HD)$ and $Lowe's(LOW)$ may also thrive in a lower-rate environment.
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
