What A Fed Rate Cut Means For Our Portfolio…
The market is new all-time highs, unemployment is near its record low, the U.S. economy is in its longest-ever expansion cycle, and the Federal Reserve is discussing a rate cut.
Welcome to the new normal.
#-ad_banner-#I am not going to start a long-winded discussion about the virtues or risks of extending the expansion phase or about the cyclicality of the economy, even though interest rate cuts have been historically reserved for when the economy is in a slump or turmoil. After all, monetary policies are out of investors’ control.
Of course, with almost the entire world on the easing path and with strong economic growth relatively scarce, it would be rational to believe that the Fed may about to reverse its recent tightening policies. Fed Chair Jerome Powell said as much Wednesday in prepared testimony to the House Financial Services Committee, hinting strongly that in light of the U.S. economy not drastically improving over the past few weeks and the world’s growth slowing, a rate cut is in the cards. The market is now pricing in a 100% probability of a cut in the July 30-31 meeting.
Whether or not we will remain on the easing path after that meeting will depend on many factors, including growth and inflation data. If the Fed stays put, the market will likely be disappointed, but placating the stock market isn’t in the Fed’s job description.
Of course, nobody can predict what the market will do next. With a quarter-point rate cut already largely priced in, when all is said and done, the market might not even get a big boost. Depending on the data and on what the policymakers will have to say, investors might start getting more cautious. A rate cut caused by a slowing economy or slumping profits isn’t really happy news. But regardless of the immediate market reaction to the Fed’s July decision, lower interest rates should help stocks to keep going. That’s because cheaper money makes risky assets such as equities more attractive relative to other assets such as bonds.
The market’s sell-off in the last quarter of 2018 was a reflection of many things. One of them was a prevailing expectation that interest rates were set to move higher. Once this notion was put to rest, stocks recovered. In fact, last year’s 4.2% decline marked the first negative return in a decade. And from 2009, when stocks began their turnaround, to 2018, the average annual return for the S&P 500 was 13.5% (with dividends reinvested). The possibility of a repeat performance should keep investors in the market.
What To Do Now
But at this late stage of the bull market, not just any stock will do. With the market getting more dangerous as the bull gets older, I’ve been telling my Fast-Track Millionaire readers that the best course of action is to invest in stocks that get their support from stronger revenue and profit growth, not just from lower interest rates.
Focusing on sales and earnings growth will help us get through the tough times, too. After all, these are the types of stocks that will likely bounce back in a big way as the market regains its strength. And if you can add such holdings to your portfolio at “sale” prices, so much the better. Just as purchasing stocks during their decline a couple of quarters ago paid off big time this year, a potential sell-off should be viewed as a buying opportunity.
Similarly, rational investors should seek buying opportunities among those stocks that have been lagging the rallying market this year.
Healthcare is one such sector. Having returned 7.66% year-to-date as I write this, healthcare stocks have been the market’s worst performers, more than 2.5 points behind the second-worst sector, energy. Healthcare stocks are now a bargain compared with the broader market, and many, many healthcare names — with products already on the market and/or strong pipelines — remain a good bet going forward.
At the other end of the sector-performance spectrum is technology, which is leading the market. One reason: many of the tech leaders, especially those in the cloud software sector, are largely insulated from the trade-war induced stress.
Not every company in a sector that’s already delivered 28% this year is going to do well from now on. Many stocks have gotten expensive, and even their explosive growth potential isn’t going to save them from investor wrath if the next set of news they deliver isn’t as rosy.
But such cloud stocks — not to mention my newest Fast-Track Millionaire recommendation — have carved such strong niches for themselves that they remain attractive even at current levels. Any weaknesses in such companies, if not caused by a fundamental change, would also be a buying opportunity.
P.S. Another sector I’m focusing on right now is cannabis stocks… That’s because not only are these stocks entering hyper-growth mode, but our sources are telling us that a key vote in Congress could happen any day now… and it will open the floodgates of investment, creating triple-digit plus gains for those who get in early. To get more details, plus my three favorite picks for the coming marijuana boom, go here now.