To The Moon

The Federal Reserve made a significant move yesterday, cutting interest rates by 0.50%, the first aggressive reduction in over two years. This brings the rate range down to 4.75%-5%, exceeding the expected 0.25% cut. While most Fed officials backed the move, Fed Governor Michelle Bowman dissented, advocating for a 0.25% hike.

Inflation Eases, Recession Risks Linger

With inflation nearing the Fed’s 2% target, its focus has shifted from inflation control to avoiding a recession. Fed Chair Jerome Powell emphasized the need to restore price stability while preventing a sharp rise in unemployment. Despite some signs of a cooling labor market, record-high consumer credit card debt—now at $1.14 trillion—highlights ongoing economic uncertainty.

Global Impact and Dollar Weakness

The Fed’s rate cut lags behind global counterparts, with many central banks reducing rates earlier this year. Interest rate changes will impact exchange rates, and a weaker dollar may help emerging markets but could also heighten global inflation risks.

Small-Cap Stocks and Gold Poised for Gains

Small-cap stocks stand to benefit from lower rates due to their higher sensitivity to borrowing costs. In a resilient economy, they could see a strong rebound. ETFs to consider include Avantis US Small Cap Value ETF (AVUV) and VictoryShares Small Cap Free Cash Flow ETF (SFLO).

Gold has surged during this rate-cut cycle, up 23.9% year-to-date as of September 13, 2024. Goldman Sachs forecasts gold could hit $2,700 per ounce by early next year. Investors can tap into gold through SPDR Gold Shares ETF (GLD) and Franklin Responsibly Sourced Gold ETF (FGDL).

Opportunities in Real Estate and Bonds

Falling rates may revive the real estate market, with both residential and commercial sectors expected to recover. ETFs like Real Estate Select Sector SPDR Fund (XLRE) and Fidelity Real Estate Investment ETF (FPRO) offer exposure.

Long-term bonds, more sensitive to rate changes, also present opportunities. As rates drop, long-term bond prices are likely to rise. Vanguard Long-Term Bond ETF (BLV) and iShares 20+ Year Treasury Bond ETF (TLT) are options worth considering.

Conclusion

The Fed’s bold rate cut presents new investment opportunities. Focus on small-cap stocks, gold, real estate, and long-term bonds to make the most of the current market environment.

$SPDR S&P 500 ETF Trust(SPY)$ $Avantis U.S. Small Cap Value ETF(AVUV)$ $Vanguard Long-Term Bond ETF(BLV)$ $Franklin Responsibly Sourced Gold ETF(FGDL)$ $Fidelity Real Estate Investment ETF(FPRO)$ $SPDR Gold Shares(GLD)$ $VICTORYSHARES SMALL CAP FREE CASH FLOW ETF(SFLO)$ $SPDR S&P 500 ETF Trust(SPY)$ $iShares 20+ Year Treasury Bond ETF(TLT)$