Financial advisors are re-evaluating their strategies in light of last week’s rate-cutting decision by the Federal Reserve, WealthManagement.com reports.
The Fed announced it would lower its benchmark interest rate to a target range between 4.75% and 5.00%, a half-point cut, making cash allocations and money-market funds less appealing for investors.
As a result, advisors told WealthManagement.com they were revising recommendations to clients to bolster their positions in equities and longer-term bonds.
Gary Quinzel, vice president of portfolio consulting at Minneapolis-based Wealth Enhancement Group, said the firm had expected the Fed’s plan on current and future rate cuts and had been adjusting its allocations accordingly.
“We have long employed a barbell strategy for Treasuries. We have now moved away from the short end and are looking to maintain duration,” Quinzel said. “With investment-grade credit, there are a lot of flows and some opportunities there. We like duration. We like seeing opportunities on the steeper end of the yield curve. We had spent some time looking at leveraged loans several months ago, and those are based on floating rates, and that’s not an area that’s as interesting anymore.”
More emphasis on equities will be appropriate going forward, he said.
“The market will bounce around a bit as we dissect the components of what Powell is saying, but we are fairly optimistic on equities,” Quinzel said. “We continue to like U.S. equities and high-quality. We have been shading away from growth to focus more on the S&P 493, as you might say. At the same time, we are maintaining our overall exposure to U.S. growth stocks.”
With the rate of inflation slowing, the Fed’s policymakers signaled that they expect to cut their key rate by an additional half-point in their final two meetings this year, in November and December. They also envision four more rate cuts in 2025 and two in 2026.
Neil Gilfedder, CIO at Edelman Financial Engines, said the firm is still waiting to see what the Fed will do next, but is advising clients to reconsider plans to put their cash into money market funds.
“With the Fed poised to continue to lower rates, being out of the market means missing out on those capital appreciation opportunities. That’s why we always advise our clients to work with us to create a plan and then stick to it,” he wrote.
Nebraska-based RIA Carson Group added exposure to long-term Treasury bonds last fall with an eye toward the Fed’s expected cuts.
“Markets tend to be forward-looking, and we have traded around anticipated cuts over the course of the year by increasing the interest rate sensitivity of our bond portfolios,” wrote the firm’s portfolio manager Barry Gilbert. “The anticipated shift toward rate cuts also supported our continued stock overweight.”
Jeff Buchbinder, chief equity strategist with LPL Financial, noted the response of stocks to prior rate cuts.
“On average, value stocks slightly outperformed their growth counterparts three and six months after the initial cut, but growth outperformed 12 months later,” Buchbinder wrote. “The 1995 cycle seems most analogous to where we are currently. During the 12 months after that cut, growth was slightly better, but value had an edge over the first six months.”
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