On September 18, the Federal Reserve surprised many with its first rate cut in over four years, reducing the benchmark rate by 50 basis points to 4.75% to 5.00%. This bold move is part of the Fed’s strategy to achieve a 2% inflation target amidst signs of a cooling economy. Recent reports show 4.1% unemployment and 2.4% inflation as of October 10th, prompting a shift to support growth and employment. 

Like many investors, you might be considering some adjustments to your investment portfolio in light of the Fed’s rate cuts. Is it too late to implement changes now that the rate reductions have already begun? Should you capitalize on certain high-yield options before rates potentially dip further? Are there specific stocks, bonds, or other investment opportunities you should focus on right now?

Identifying Investment Options During While Interest Rates are Low

When figuring out where to invest, start with a clear understanding of your own financial landscape. Consider elements like your time horizon, goals, and risk tolerance. Taking a long-term view is often more beneficial than focusing solely on whether interest rates might drop. For instance, if retirement is on the horizon, you might rely heavily on investments that generate income, like bonds. When rates fall, the value of existing bonds often goes up, although their yields decline since their coupon payments remain unchanged.

Who benefits from higher rates?

Before we dive into where we can benefit the most as interest rates lower, let’s first look at where we’ve been and how higher rates benefited some. Savers, bond investors, and lenders often see advantages during times of elevated interest rates. While inflation can chip away at the dollar’s purchasing power, impacting gas prices, groceries, and rent, there are certain groups that actually benefit from these higher rates. Let’s review who they are:

• Fixed-interest-rate borrowers
• Food producers
• Collectors
• Landowners and real estate investors
• Banks, mortgage companies and credit card issuers
• Health care ecosystems
• Energy and EV manufacturers

What strategies may benefit from rate cuts?

Now, let’s dive into some investments that could see an uptick as interest rates dip: 

• Growth stocks. These often gain momentum with rate cuts as borrowing becomes cheaper and the value of future earnings increases. This is why we frequently see tech growth stocks perform well in these environments.
• High-yield bonds. These types of bonds can thrive with rate cuts since they offer higher returns, attracting investors.
• Real Estate Investment Trusts (REITs). With their ability to yield higher returns than traditional equities and benefit from decreased borrowing costs, REITs become quite appealing when rates are low. They are also required to distribute at least 90% of their net earnings to shareholders as dividends.
• Preferred stocks. Sharing similarities with bonds, preferred stocks feature fixed dividends. When interest rates drop, these become advantageous as they typically provide better yields over common stocks and bonds.
• Dividend-paying stocks. Companies with steady dividends or a track record of dividend growth become even more attractive in a low-rate setting as fixed-income yields decline. ETFs like the SPY and Vanguard Dividend Appreciation ETF (VIG) offer a bundle of these dividend stocks.

What are some of the best high-yield investments? 

Balancing short-term savings with long-term growth should be an essential part of your financial strategy. As you gear up for interest rate cuts, think about reallocating some of your high-yield savings accounts into certificates of deposit (CDs). This approach allows you to lock in better rates now. To stay flexible, you might consider CDs with different maturities. This “ladder” technique can help keep your money accessible and mitigate interest rate risks. Remember, CDs are insured up to $250,000 by the FDIC if held in banks. 

Looking to diversify? High-yield bonds or dividend stocks can be attractive, especially in downturn rate periods. Investments like real estate investment trusts (REITs), preferred stocks, and ETFs usually present better yields than regular stocks or bonds. 

You can also explore a range of risk-tolerant choices, from money market funds to more nuanced investments like defined-maturity ETFs and preferred stock offerings. Bonds, in particular, are gaining popularity in this shifting market.

So, what stocks should we consider while interest rates fall? 

Lower interest rates translate to reduced borrowing costs for companies, which is notably advantageous for small firms and startups. Reduced capital costs can encourage businesses to expand. When the Fed decreases rates, it can stimulate investment spending, promote economic growth, and lessen the likelihood of a recession. While global uncertainties remain, falling interest rates usually benefit the economy and stock markets. Some sectors that stand to gain include: 

• Technology. Information Technology, a sector requiring significant capital, benefits from decreased borrowing expenses. This facilitates continued investments in research, development, and strategic mergers or acquisitions. 
• Consumer discretionary. When borrowing costs fall, people might feel more inclined to spend on non-essential goods and services. 
• Consumer staples. Such as food, beverages, and household goods, are the reliable purchases people make regardless of economic swings. The demand for these products remains solid and consistent because it’s largely unaffected by economic changes. Unlike other sectors that may flourish as rate cuts boost spending and investment, consumer staples offer a cushion with their stable cash flows, providing a sense of security during market turbulence. 
• Utilities. Utilitiy Companies, which deliver services like electricity, water, and natural gas, often offer dividends. As the Fed reduces interest rates, bonds lose their appeal due to their inverse relationship with interest rates, making utility stocks an attractive income alternative for investors. 
• Real estate. Lower borrowing costs make real estate more enticing for buyers, bumping up demand and property values. This is good news for investors seeking capital growth. Plus, real estate investment trusts (REITs) often shine as their yields appear more lucrative compared to low-yield bonds. So, during rate cuts, real estate can enhance and diversify your investment strategy.

Building economic security is a gradual process, regardless of the economic environment.

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Editorial disclaimer: Piere does not provide legal, tax, investment/retirement planning, or financial advice. Piere is not a financial advisor, planner, broker, or tax advisor. Any content Piere produces is provided for educational purposes only and is intended only to assist you in your financial organization and decision-making. Your personal financial situation is unique, and any information provided may not be appropriate for your situation. Readers are encouraged to conduct their own due diligence and consult with a qualified financial professional before making any financial decisions.