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- With Rate Cuts Looming, Advisors Need To Change Strategy
With Rate Cuts Looming, Advisors Need To Change Strategy
Here's what to do
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Happy Sunday everyone, and welcome to Benzinga’s financial advisor newsletter.
Today we’re discussing the Fed’s upcoming interest decision, and what the probable cut means for investors - and how advisors need to switch their strategies to adapt.
So, let’s get into the Industry Chatter!
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INDUSTRY CHATTER
As the Federal Reserve prepares to cut interest rates, Americans will need to adjust their bond and income portfolios to capitalize on current yields and protect against future market shifts. This means advisors and wealth managers need to reassess their fixed-income strategies.
Recent economic data on employment and inflation has reinforced expectations of imminent rate cuts. The benchmark 10-Year Treasury Note has already reacted, with its yield dropping to 3.7% from a 2024 high of 4.7% in April. In response, advisors are taking varied approaches to portfolio management.
Increasing Exposure To Bonds
Eric Amzalag of Peak Financial Planning has been progressively adding bond exposure over the past year and plans to increase allocation to long-duration US government bonds. However, he's waiting for 10-Year Treasury yields to bounce back to 3.9-4% before fully implementing this strategy.
Meanwhile, Daniel Lash of VLP Financial Advisors has gradually shifted from shorter to more intermediate-term duration over the past two years. He's cautious about moving to long-term duration, citing inadequate risk-reward trade-offs at present.
Best Income Opportunities In A Decade
Mabrouk Chetouane from Natixis Investment Managers emphasizes the protective role of bonds against potential equity market downturns. And Ed Al-Hussainy of Columbia Threadneedle Investments notes that current yield levels offer income opportunities unseen in a decade, highlighting potential in agency MBS and asset-backed securities.
Of course, what the Fed will really do remains to be seen. Will Sterling of TritonPoint Wealth believes market participants are too aggressive in their rate cut expectations, anticipating 250 basis points of cuts over the next 12 months.
Time To Cut High-Yield Exposure
Finally, Brandon Ross of Quotient Wealth Partners is reducing credit risk by trimming high-yield exposure and adding quality investments. He's also incorporating active managers for fundamental analysis to identify undervalued, higher-quality bonds.
As the Fed approaches its first rate cut, advisors are balancing duration strategies to benefit from potential rate decreases while maintaining flexibility to respond to market volatility. This calculated approach aims to optimize client portfolios in an evolving economic landscape, blending protection with opportunistic positioning.
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MARKET RECAP
The volatility that dominated markets in the early part of the month sharply reversed in the past week, driven by growing expectations of interest rate cuts that have bolstered investor risk appetite.
The latest batch of inflation statistics for August have given the green light for the Federal Reserve to proceed with an interest rate cut, which is highly likely to occur on Sept. 18.
The remaining question concerns the size of the cut — whether it will be 25 basis points or 50 basis points — though market consensus and recent comments from Fed officials suggest the more conservative 25 basis points is the likely scenario.
Risk assets experienced a significant rebound, with the S&P 500, as tracked by the SPDR S&P 500 ETF Trust (SPY), recovering losses from the prior week and notching five straight days of gains. A similar picture emerged for the Nasdaq 100, which marked the best week since October 2023.
Treasury yields fell substantially and the dollar weakened, driving the price of gold to fresh all-time highs.
Additionally, the week saw the first televised debate between Vice President Kamala Harris and former President Donald Trump, with polls indicating Harris outperformed, further widening her lead.
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Gold Miners Surge
Gold mining stocks, as monitored through the VanEck Gold Miners ETF (GDX), rallied this week, marking on Thursday their best one-day performance in six months as gold prices hit new record highs. A macro strategist highlighted striking similarities between today’s economic landscape and the turbulent 1970s.
VP Harris Boosts Solar
Solar stocks, tracked by the Invesco Solar ETF (TAN), surged as Vice PresidentHarris emerged as the clear winner in her debate with Trump, bolstering confidence in clean energy policies. Several leading renewable energy companies saw sharp gains this week.
Small Cap Rally
In an exclusive interview with Benzinga, a Lazard small-cap expert forecasted a 30-50% rally in the Russell 2000, fueled by declining interest rates and strengthening economic conditions. With the Federal Reserve poised to begin a rate-cutting cycle, small-cap stocks are anticipated to outperform, closing the performance gap with larger-cap counterparts.
Autonomous Vehicle Growth
U.S. autonomous vehicle sales are projected to reach 230,000 units by 2034, following renewed progress at Alphabet Inc.’s (GOOG,GOOGL) Waymo and General Motors Co.’s (GM) Cruise. Advancements in technology and regulatory approvals are expected to drive the industry forward, boosting consumer adoption and market penetration.
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THE WEEK AHEAD
Economic Data
Monday: NY Fed manufacturing index
Tuesday: US monthly retail sales
Wednesday: Fed interest rate decision
Thursday: Japan and UK interest rate decisions, US existing home sales
Friday: UK and Canada retail sales
Earnings
Click here for the full calendar of economic data and earnings reports.
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