Eight Strategies for Navigating Fed Rate Cuts

With the Fed cutting rates for the first time in more than four years, kicking off what is expected to be a longer-term easing cycle, financial advisors are adjusting client portfolios, accordingly.

As the following eight perspectives illustrate, there are multiple factors to consider when guiding clients into and through a rate-cutting cycle.

The initiation of an FOMC rate cutting cycle marks a notable shift in economic focus, creating opportunities for strategic portfolio positioning and entry points for enhanced diversification.

Rate cuts could serve as a catalyst for U.S. small caps to relatively outperform as lower borrowing costs could bolster earnings growth if the soft-landing backdrop persists. Historically speaking, rate cuts have served as a tailwind for value stocks over growth stock, and have correlated with U.S. dollar strength when recessions have been avoided, giving preference to U.S. equities broadly over international.

~ Ben Vaske, Senior Portfolio Strategist at Orion in Omaha, Neb.
 

There's a very good chance that the Fed will be cutting rates by a larger degree than other major central banks around the world. That could result in the dollar declining vs. the euro, yen and other currencies.

We've already seen this happening over the last few weeks. If so, it could be a period where non-U.S. stocks outperform their U.S. counterparts. If you have been underweight in Europe and Asia, now might be a time to add exposure.

~ Tom Graff, Chief Investment Officer at Facet in Phoenix, Md.
 

During a cycle of Fed rate cuts, investors should consider increasing exposure to under-loved areas of the markets, including small-caps, mid-caps, value and international. Small-caps, mid-caps and value benefit from widening market breadth as the Fed cuts rates, while international benefits from a weaker dollar via currency translation.

Investors may also want to temper some of the duration bets made this year. With the Fed cutting rates in a relatively strong economy, the threat of reflation is real. We may have seen 2024 lows in bond yields so reduction of some duration bets may be prudent.
 

~ Gene Goldman, Chief Investment Officer at Cetera Financial Group in San Diego, Calf.
 

As we look across the belly of the curve today it’s incredibly flat where investors receive a very similar level of yield for 2, 5, or 10 yr treasury bonds, but with increasing levels of interest rate risk.

In our view, the front end of the curve is still the better place to be, and to be significantly adding duration to bond portfolios today would be chasing the curve.

A better approach than simply just adding traditional duration is to focus on mortgage-backed securities which may still offer value. 
 

~ Stephen Tuckwood, Director of Investments at Modern Wealth Management in Monterey, Calf.
 

Intermediate-term government and corporate bond ETFs can be a good strategy for a period of declining interest rates. You can capture an increase in bond price when rates fall, plus you get monthly dividends.

If you want to be more aggressive, consider investing in a long-term government bond ETF. Long-term bonds are more price-sensitive to interest rate changes. It can backfire though, if rates start to creep up.
 

~ Alvin Carlos, Managing Partner at District Capital Management in Washington, DC
 

Each Fed rate cutting cycle is a little different going forward based on what market action has taken place during the rate hiking cycle, but generally preference for short duration fixed income as short rates tend to come down faster and more than long rates, which is what we’ve been seeing so far and expect to continue, given the underlying growth trends and inflation levels in the economy.

On the equity side, preference for more cyclical companies with operating leverage tend to be preferred as companies call bonds and reissue lower rate debt and get some relief from existing debt on their balance sheet. That tends to result in earnings expectations getting revised up.

~ Stephen Kolano, Chief Investment Officer at Integrated Partners in Waltham, Mass.

Within fixed income, longer duration bonds and funds typically benefit most from a broad decline in interest rates. However, in the short term, performance hinges on which part of the yield curve sees the steepest decline. When considering credit quality, if the economy is heading into a recession, Treasuries and government-backed bonds are likely to outperform. 

As the economy transitions toward recovery, corporate bonds should deliver stronger returns. Alternatively, if rates are falling due to normalization (a soft landing), corporate bonds, particularly high yield, should outperform Treasuries.
 

For equities, in a recessionary environment, defensive stocks are likely to perform best in the early stages. 
 

~ Ryan Bouchard, Founder of Rising Tide Wealth Advisory Solutions in St. Louis, Mo.
 

Prepare for declining interest rates through next year by buying short-term rates. I prefer to lever short-term Treasuries with an equal amount of duration risk as the broader Agg bond index.

I focus the majority of my duration risk on short-term interest rates rather than across all interest rates.
I have higher conviction that the Fed will lower short-term rates through next year while intermediate and long-term rates remain unchanged, allowing the curve to assume its more normal shape and undoing its inversion. 

I question whether the intermediate and long-term bonds will decline as the Fed lowers the front end, especially if the economic growth hangs in there.
 

~ Noah Damsky, Founder of Marina Wealth Advisors in Los Angeles