The Fed could cut interest rates in 2024. How investors can prepare

The Fed could cut interest rates in 2024. How investors can prepare

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The rise in stocks is unlikely to last

Falling interest rates are generally a blessing for the stock market, consultants said. One of the reasons: Companies can borrow money more cheaply and are therefore more likely to make large investments in their company.

However, there is unlikely to be a repeat of last year’s stellar stock performance in 2024, advisers said.

The US stock index S&P 500 rose 24% in 2023 after a year-end rally. This increase was partly forward-looking, reflecting investor expectations of lower interest rates in 2024.

“The stock market is the great anticipation machine,” said Charlie Fitzgerald III, a certified financial planner based in Orlando, Florida.

“If anyone has tried to time the market, they may have already missed it,” added Fitzgerald, founding member of Moisand Fitzgerald Tamayo. “Because that’s what happened in the fourth quarter.”

Of course, that doesn’t mean that all market growth is in the rearview mirror. But don’t make the mistake of buying stocks expecting them to keep rising, he said. This tendency is called recency bias.

However, growth stocks like those in the technology sector are more likely to benefit from lower interest rates than value stocks, said Ted Jenkin, CFP, founder of oXYGen Financial in Atlanta and a member of CNBC’s Advisor Council.

Now it’s time to set CD prices

Cash and cash-like investments — such as high-yield savings accounts, money market funds and certificates of deposit — have been among the big beneficiaries of rising interest rates. Cash interest rates rose to their highest level in years.

However, these interest rates will likely fall once the Fed begins reducing borrowing costs.

“If you can set CD prices [at current levels]this is probably a good time to do it,” Jenkin said. “There are still a lot of places that offer 5%.”

Savers don’t come across longer-term CDs, such as a five-year term, much more than they do shorter-term CDs, such as a one-year term – so it may make more sense to opt for a shorter-term CD term, said Jenkin.

Bonds are about to burst

Bonds have been hit by the Fed’s rate hike cycle.

This is because bond prices move inversely to interest rates. It’s like a seesaw: When interest rates rise, bond prices fall.

Stock prices of bond mutual funds and exchange-traded funds fell in 2022, the worst year ever for U.S. bonds.

The stock market is the great expectations machine.

Charlie Fitzgerald III

certified financial planner

If interest rates fall now, bond funds are poised for a recovery, according to consultants.

An environment with gradually falling interest rates “is an easy place to make money in the bond market without much risk,” Fitzgerald said.

Those who strongly believe interest rates will fall might consider buying longer-dated funds, which would generally benefit more from falling interest rates, Jenkin said. However, they also pose a higher risk, he said.

REITs are another likely beneficiary of interest rate cuts

Real estate investment trusts should also do well given falling interest rates, Jenkin said.

“This is one of the best moves I would make with my money” if I expected interest rates to fall, he added.

The REIT sector “depends heavily on the debt market to conduct its business activities,” and such companies therefore benefit from lower borrowing costs, according to Zacks Equity Research.

For investors who buy, it might make more sense to do so through a retirement account such as an individual retirement account or a 401(k) plan so that the dividends are not taxable until later, Jenkin said.

As with any of these recommendations, it’s important to make investment decisions within the context of a diversified portfolio, Fitzgerald said.

Hold an appropriate amount of stocks in your portfolio relative to your age and time horizon, be disciplined and don’t panic when the market falls, he added.

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2024-01-03 16:04:18