The US Federal Reserve has given its clearest signal yet that rate cuts are coming.
At the central bank’s meeting last week, Chair Jerome Powell said his focus now is deciding when to reduce benchmark interest rates in 2024. That ignited a cross-asset rally, sending global share prices higher and the yield on 10-year US Treasuries dipped below 4% for the first time since August.
Investors are now pricing in six quarter-point rate reductions in 2024 by the Fed, twice the three penciled in by the central bank. Of course, Powell also said that officials may hike again if price pressures return. What does all this mean for your money?
Here’s what you need to know:
Will my investments be impacted?
Right after Powell’s speech, everything from global stocks to corporate bonds surged higher, for the best Fed day across all asset classes in almost 15 years.
Interest rate cuts are generally a positive catalyst for stock prices, especially growth companies whose value comes from their future earnings potential. So-called risk assets, including lower-quality tech stocks and high-yield bonds, should receive a boost.
“Assuming this doesn’t mean the Fed is now worried about a recession, it has given investors the green light to keep buying risk assets with both hands,” said Matt Maley, chief market strategist at Miller Tabak + Co.
Assets around the world may also benefit from rate cuts in the US.
“A textbook dovish pivot response in stocks and the US dollar should bode well for Asian equities,” said Chamath De Silva, a senior fund manager at BetaShares Holdings in Sydney. “The exception might be Japan, which will have to deal with big yen strength.”
What about the 60/40 portfolio?
The classic portfolio structure of 60% stocks and 40% bonds has had a rough time recently, but may be poised for success now.
For decades, this portfolio produced strong risk-adjusted returns. The idea had long been that stocks provide growth and bonds provide relative stability, on the assumption that the two are not tightly correlated.
That stopped working as the Fed jacked up rates. Both stock and bond prices fell and last year, and portfolios with a 60/40 blend actually dropped 17%, their worst performance since 2008. Some researchers have even found that over time, certain all-stock portfolios beat those blended with bonds in both money made and capital preserved.