After four and one-half years, the Fed has embarked on a rate cutting cycle, the twenty-third such cycle since 1928. However much Fed Chairman Jerome Powell and the Fed decide to cut, whether it be 25 or 50 basis points, the cycle has begun and now investors are trying to decide where to deploy capital. Some things we are keeping an eye on are the following:
Torsten Slok, the chief economist for Apollo Asset Management came out with an article this week called “Higher for Longer, Still for Longer” in which he states “If we assume the interest rate futures market is correct in pricing in at least four rate cuts in 2024—which we believe is overblown—short-term interest rates would by the end of 2024 be around 4.5%, a level that would still be the highest for overnight rates since 2007 (excluding the Fed’s current hiking cycle). Furthermore, if we take in the expectations for additional ~five rate cuts in 2025, rates will reach 3% by the end of next year, which is nearly double the average 1.8% rate over the past decade.”
As you can see in the chart above, the yield on the 3-month U.S. Treasury bill is currently 4.85%. As rates begin to decline, yields on money markets will follow. If his base case is correct and yields drop down to 3%, this would imply that the “Real Rate,” the rate adjusted for inflation, will be roughly 1%. What this means to us is that it would be a good time to extend the duration of the bonds in your portfolio.Some other historical statistics we find interesting:
- Of the last 22 rate cutting cycles, in the 12 months following the first rate cut, the average return of the U.S. stock market was roughly 11%.
- Small caps tend to do well as they have greater financing needs. With lower rates, the cost of capital will be lower. We have seen some recent outperformance with the Schwab U.S. Small Cap ETF (SCHA) having risen 8.68% in the last three months.
- Consumer non-cyclicals historically performed best after the first interest rate cut, driven by consistent demand for essential goods. In fact, over the twelve months following such a cut, their average return is 7.7% above the broader market, followed by Consumer cyclicals at 7.0%, Information Technology at 5.20% and Health Care at 4.50%.
“This presentation is not an offer or solicitation to buy or sell securities. The information contained in this presentation has been compiled from third party sources and is believed to be reliable, but its accuracy is not guaranteed and should not be relied upon in any way, whatsoever. Fagan portfolio characteristics and holdings are subject to change at any time and are based on a representative portfolio. Holdings and portfolio characteristics of individual client portfolios may differ, sometimes significantly, from those shown. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities listed.
Additional information including management fees and expenses is provided on our Form ADV Part 2. The actual return and value of an account fluctuate and, at any time, the account may be worth more or less than the amount invested. Bond Investments are affected by interest rate changes and the credit-worthiness of the issues held in the portfolio. A rise in interest rates will cause a decrease in the value of fixed income positions. Past performance results are not indicative of future results.”
Copyright (c) 2024 Clearnomics, Inc. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company's stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.
