Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Head of FX Strategy
With the Federal Reserve expected to cut rates, it’s time to consider how your portfolio is positioned for this shift. Rate cuts typically bring about significant changes in market behavior, and exchange-traded funds (ETFs) offer a flexible way to adjust your portfolio accordingly. Let’s look at the sectors and ETFs that could be considered to help you navigate this new environment.
Lower interest rates tend to reduce mortgage costs, potentially reigniting demand for homes and boosting the housing market. Homebuilders stand to benefit from this dynamic, making them a solid play in the early stages of rate cuts.
Small-cap stocks, especially in the U.S., tend to perform well in a falling rate environment due to their reliance on domestic borrowing and growth. Lower rates reduce financing costs for smaller companies, giving them room to expand.
With the economy potentially heading into a recession, consumer staples and utilities become attractive for their stability. These sectors tend to outperform during economic slowdowns, providing steady dividends and reduced volatility.
As rates fall, income-producing assets such as REITs (Real Estate Investment Trusts) and high-dividend stocks become more attractive. These assets tend to benefit from lower financing costs and investor demand for yield.
A weaker dollar resulting from rate cuts can drive up commodity prices. While activity commodities such as oil and copper might be influenced by recession worries, precious metals are likely to benefit more from Fed rate cuts due to reduced funding costs.
The U.S. dollar typically weakens in response to rate cuts, making safe-haven currencies like the Japanese yen and Swiss franc more attractive. If you're looking to diversify currency risk, consider adding yen exposure to your portfolio.
Falling interest rates increase the value of existing bonds, but investors should be cautious with long-duration bonds as inflation risks rise. Inflation-protected securities (TIPS) offer a way to maintain income while hedging against future inflation.
A rate cut by the Fed often leads to a steepening of the yield curve, meaning the difference between short-term and long-term interest rates increases. This can benefit certain bond strategies.
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