Interest Rate Cuts on the Horizon? | The Investors Edge
By John Stewart, chief investment officer at Farmers Trust Co.
Week in Review: Markets Stabilize
Well, the Fed didn’t sink markets with their recent rate hike, and so far, neither have the recent bank failures. I did mention a couple of weeks ago on the Investors Edge that there was a narrow window for the Fed to thread the needle and for the stock market to rally.
It seems, for the time being anyway, that they have done just that, and investors who placed bearish bets are being forced to unwind those positions, adding fuel to the rally.
It is important not to get too complacent, however, given that a lot of the trends that have driven market volatility are still in place. It will take time for the tightening in credit conditions stemming from the recent banking turmoil to manifest itself in the real economy.
We’ll begin to see what companies are expecting the next several months to look like for their businesses when they start reporting first quarter earnings here in a couple of weeks.
If earnings expectations deteriorate, we are likely to experience more market volatility ahead.
Featured Insight: Diversification is More than Stocks and Bonds
I talk a lot about the merits of diversifying your investments, but I don’t often explain what that means. Diversification is a lot more than just getting your mix of stocks and bonds right.
You need to ensure that within those categories that you own investments that have differentiated risk and return characteristics, that behave differently based on where we are in the economic cycle, and that provide appropriate exposure around the world.
This means owning securities from different sectors of the economy, businesses at different points of their life cycle, and companies of varying sizes both large and small.
Fixed income securities should be similarly diversified, but also need to vary in their maturity length. Regularly occurring bond maturities help provide liquidity to your portfolio in case you need to draw funds, especially if that coincides with a market downturn, in which case you’d likely prefer to hold onto your equity investments until market conditions improve.
Looking Ahead: Interest Rate Cuts on the Horizon?
Two weeks ago I spoke about the likelihood the Fed would raise its key interest rate target by an additional one-quarter of one percent. Indeed the central bank did in fact do just that.
Nevertheless, futures markets are not only predicting the Fed will soon be done hiking rates any further, but that they may be forced to do an about-face and actually cut rates as early as June.
These futures contracts imply there could be as much as a full percentage point in rate cuts by this time next year, which seems implausible given the rate hiking dynamic over the past 12 months. Think back to one year ago, though – at that time did anyone, including the Fed themselves or the collective wisdom of market participants, think they would go from 0% interest rates to 5% in one short year?
It’s important to keep in mind that anything is possible, and there are always surprises in markets.
For the sake of investors, let’s hope the predictions of rate cuts in the near future are wrong, because that would likely occur only in the event of more significant economic and market deterioration. Since that is certainly a possibility, stay diversified and keep a long-term perspective to avoid getting sucked into the short-term emotions of fear and greed.
Copyright 2024 The Business Journal, Youngstown, Ohio.
