Manager’s Thoughts: The First Rate Cut

Author:  Joe Maas, CIO SPG Advisors LLC

Friday, September 20th, 2024

The First Rate Cut in Four Years
Wednesday’s FOMC meeting marked a pivotal moment as the Federal Reserve implemented its first rate cut in four years. This was not just any rate cut; it was a substantial reduction of 50 basis points, exceeding market expectations of a 25 bps cut, which had already been fully priced in. As a result, the target range for the Federal Funds rate now stands at 4.75% – 5.0%. While stocks remained relatively unchanged at the close on Wednesday, Thursday saw a rally as the market digested the news.

Looking Forward
The Federal Reserve’s dot plot released alongside the announcement projects an additional 50 basis points of rate cuts by the end of the year. If this projection holds, the Federal Funds rate would settle within the range of 4.25% – 4.5%, which remains elevated when compared to historical averages over the past decade. Barring any significant shifts in economic conditions, we anticipate that the Fed’s projections will be an accurate guide to where rates will stand at year-end.

How It Will Affect Portfolios
As always, we remain focused on the key drivers of market conditions: the Federal Reserve, interest rates, inflation, corporate earnings, and geopolitical events. While our analytical framework is unchanged, we are adapting to the Fed’s recent actions and evolving monetary policy as part of our broader macroeconomic outlook.

Portfolios may benefit from this rate cut in several ways. For fixed-income investments, assets with higher coupons are well-positioned to gain as market yields decline, given the inverse relationship between bond prices and yields. In fact, the Barclays Aggregate Bond Index (AGG) has already reacted, rising 5.5% between July 1, 2024, and September 18, 2024, in anticipation of rate cuts.

Equities may also see positive effects, particularly if the broader economy remains robust and the labor market remains stable. Small-cap stocks could be positioned to benefit from lower financing costs and potentially rising valuations, driven by a lower discount rate. Additionally, debt-heavy sectors like real estate may experience gains due to reduced borrowing costs.

As always, we will remain vigilant in monitoring the Federal Reserve’s actions and broader market dynamics, making portfolio adjustments as necessary.

We appreciate your continued trust.

Thank you,

Joseph M. Maas,
CFA, CFP®, ChFC, CLU®, MSFS, CCIM, CVA, ABAR, CM&AA

The information contained herein is general in nature. It does not take into account your particular investment objectives, financial situation, or needs. It is provided for illustrative or informational purposes only, and should not be construed as advice. Our advisors can meet with you to discuss your retirement plan.

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