How Imminent Rate Cuts Will Impact Investors
Several sectors of the economy are anticipating rate cuts following Jerome Powell's comments at Jackson Hole.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
Dovish commentary from Fed Chairman Powell Friday from Jackson Hole triggered a large rally in the markets and allowed the major indexes to post solid gains for the week. The head of the central bank stating that it was finally time to "adjust" monetary policy was music to investors' ears as they have been waiting for interest rate reductions throughout 2024. It looks like they finally will get their wish starting at the September FOMC meeting.
The only real question is whether the Fed cuts its interest rate by 25 BPS or 50 BPS at this point. A lot will depend on the September jobs report that will be released before the bell on September 6. This will likely be the most important monthly reading so far in 2024, and not only because it will play a big role in determining the size of the upcoming reduction in the fed funds rate later in the month. Investors could use some reassurance that the jobs market is still solid after a bad miss in August. In addition, the BLS massively reduced its previous estimate of actual jobs created in 2023. Another miss, especially if it is like August, could trigger a sell-off in the market even if it means a much higher likelihood of a 50 BPS reduction in interest rates.
I don’t take coming rate reductions as a panacea that most of the market is currently interpreting them to be. That said, the "sugar high" in stocks could persevere for the rest of the month, especially if NVIDIA Corporation NVDA beats expectations with its quarterly update later this week.
Not surprisingly, real estate related stocks shot up on Friday. Coming rate cuts are likely to be marginally helpful to residential real estate. Even if mortgage rates come down to 6%, there will still be tens of millions of homeowners locked in at 3% on their existing mortgages and housing affordability will remain near historical lows. This is one reason why existing home sales fell 16% on a year-over-basis in July. New home sales are faring much better with a more than 10% tick up in July in this metric. Rate cuts should be somewhat helpful to home builders as they will lower the numbers and costs of "incentives" needed to move inventory such as mortgage rate buy downs. Commercial real estate will remain under pressure, and I expect delinquency and default rates to continue to climb. Especially on office properties where values continue to collapse.
The small-cap Russell 2000 rose north of 3% on Friday. I will be interested to see if this the start of another big sector rotation into the small-cap arena, which has underperformed its larger peers substantially in recent years. We saw one of these waves in July, but it fizzled out earlier this month.
Finally, lower rates combined with the profligate deficit spending by the federal government will be a headwind for pushing down the rate of inflation further. The recent weakness in the U.S. dollar could persist and the environment remains ripe for gold to continue to make new all-time highs.
And those are thoughts on the coming fed funds rate cuts as we start a new trading week.
At the time of publication, Jensen had no positions in any securities mentioned.
