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While the Federal Reserve has indicated it would cut rates three times this year at its most recent two-day Federal Open Market Committee (FOMC) meeting on March 19 and 20 — it is not clear when these will occur.
Stubborn inflation standing at 3.5% in March, according to the hotter-than-expected Consumer Price Index (CPI) released on March 12 might delay the cuts — as it is still off the Fed’s 2% target. So are certain investments still worth it?
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The Fed, which is holding the next FOMC meeting from April 30 to May 1, has already telegraphed that the cuts might happen later in the year. Indeed, on April 16, Chair Jerome Powell said there was “a lack of further progress” on bringing inflation down, adding that “it’s likely to take longer than expected” to get enough confidence to start easing back on policy, CNBC reported.
“Inflation is the only blemish on a U.S. economy that has continued to perform well,” Mark Zandi, chief economist of Moody’s Analytics said in an April 15 research note. “If the latest bounce in inflation persists, then not only will the Fed be unable to cut rates soon, but its next move will be to hike interest rates.”
Against this backdrop, experts said that there are still investments worth looking at before the rate cuts happen.
Also here are nine safe investments with high returns.
U.S. Stocks
JPMorgan Chase — one of the largest banks in the U.S. stands to benefit from lower interest rates as it can borrow money at a cheaper rate, allowing it to offer more favorable loans and increase profitability, said Michael Collins, chartered financial analyst (CFA), founder and CEO of WinCap Financial.
In addition, Collins noted that Home Depot is a stock worth looking at, as interest rates decline, homeowners may be more inclined to take out loans for home renovations and improvements — which could benefit companies such as Home Depot that sell building materials and home improvement products.
Collins also noted that Microsoft has strong financials and consistent growth potential. In turn, lower interest rates could lead to more favorable conditions for businesses to invest in technology upgrades and software solutions, potentially boosting its sales and revenues.
Finally, Collins said that Walt Disney’s diverse portfolio and strong brand recognition make it a solid pick in this category.
“The entertainment industry tends to perform well during periods of low interest rates, as people may have more disposable income for leisure activities,” he said.
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Small Cap Stocks
Rate cuts have a more pronounced effect on small-cap stocks than on mid- and large-cap stocks, said Peter Earle, senior economist at the American Institute for Economic Research.
“Smaller firms tend to rely more on borrowing and face higher rates on loans due to the higher risk associated with them, so lower rates tend to impact them quite positively,” he said.
Robert Johnson, Ph.D., CFA, chartered alternative investment analyst (CAIA), professor of finance at Heider College of Business, Creighton University and chairman and CEO of Economic Index Associates, also said that historically, small-cap stocks performed markedly better when Federal Reserve interest rates are falling.
For instance, he said that from 1966 through 2023, small-cap U.S. stocks returned 30.1% in expansive monetary policy periods — when rates were falling — and only 4% in restrictive periods — when rates were rising.
Treasuries
Like corporate bonds, treasuries also benefit greatly from a declining rate environment. As Dan Rawitch, founder of University of Options said, when bond yields fall, the price of the bond goes up.
“Owning today’s 5% Treasury is going to be worth a lot more money when rates fall to 3%,” Rawitch said, adding that the bond owner who bought today at higher rates is sitting on an asset that is yielding more than the bond investor who bought today. Investors will pay a higher price to get this higher yield.
“So, like corporate bonds, Treasury bonds can benefit greatly when rates fall,” he said.
Investment-Grade U.S. Bonds and Corporate-Grade Bonds:
This is another smart move to make prior to a decline in interest rates, said Thomas Brock, CFA, certified public accountant (CPA) and expert contributor at Annuity.org.
“Bond prices are inversely related to interest rates and the relationship is most pronounced for bonds with relatively long durations,” Brock said. “Investing in these instruments prior to a rate-cutting regime can result in outsized investment returns.”
Corporate bonds are interesting because not all corporations that issue debt are equal, Rawitch said, noting that weaker companies with poor balance sheets are going to have to offer much higher yields to the investors who buy them.
“On the other side of the spectrum, we have AAA-rated companies issuing the highest quality bonds,” he said. “Because of the quality, they will offer a much lower rate. When the Fed cuts rates all bonds will benefit. When bond yields drop, their prices rise and every type of bond will benefit.”
Real Estate Investment Trusts (REITs)
REITS — in essence, mutual funds that buy real estate instead of stocks — provide portfolio diversification and are a great way to derive passive income.
Abby McCarthy, senior vice president of investment affairs at Nareit, said research shows that historically, REITs outperform both equities and private real estate after Federal Reserve tightening cycles end.
“We saw a glimpse of this in the fourth quarter of 2023 when REIT total returns bounced back with an impressive performance as markets priced in the Federal Reserve’s move toward a more accommodative period and potential rate cuts,” she said.
McCarthy added that recently, REITs have “reset” in 2024 as hopes for near-term rate cuts have dimmed.
“Historic performance makes us optimistic that REITs will rebound when the Fed’s policy becomes more accommodative and there is more certainty around the timing of rate cuts,” she said.
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This article originally appeared on GOBankingRates.com: 5 Investments Worth Consideration Before Rates Fall To Optimize Your Portfolio
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