The Fed’s Rate Cut and Its Impact on Your Portfolio

In September, the U.S. Federal Reserve made headlines by cutting the federal funds rate by 50 basis points (0.5%), sparking a wave of speculation about its impact on the economy and the markets. While it may seem like a significant event to economists and market watchers, the truth is that these macroeconomic shifts often have little impact on long-term investment strategies. As our Advisory Team discussed the news, the consensus was clear: this rate cut is just another piece of short-term market noise. But for those interested in how these decisions ripple through the economy—from bond yields to mortgages and credit card rates—there’s more to understand beneath the surface.

Why is Cutting the Federal Funds Rate a Big Deal?

In short, the base rate drives everything in the U.S. economy—from bond yields to mortgage loans, credit card interest rates, and even equity valuations. While it’s a nuanced subject, it can be summarized briefly: lower interest rates are more stimulative for economic growth and less restrictive to the consumer. Since consumer spending makes up about two-thirds of the U.S. economy’s GDP, this helps fuel economic growth.

Before this rate cut, the base rate had been held steady (5.3 – 5.5%) for over 12 months. The last cut was in March 2020 due to recession concerns driven by the COVID-19 pandemic. This time, the Fed and economists forecast a low probability of recession in the coming year, and thus the rate cut indicates the economy has cooled enough for the Fed to act without fear of rekindling inflation. The market expects another 1.5 – 2.0% cut by the end of 2025, but many factors could affect this outlook.

Equity Market Performance in 2024

Equity markets, both domestic and international, had stellar performance in Q3 2024, rising over 5%. Stock performance is a leading economic indicator, reflecting how global economies are performing and will likely perform in the near-to-medium term. Despite some ups and downs—such as the Yen-carry trade debacle in early August—equities quickly stabilized and continued to perform strongly. However, volatility may increase following the U.S. presidential election and amid ongoing geopolitical tensions. Over the long run, these macro events are generally just blips on the radar and do not have a material effect on equities.

Domestic Equities: Sector Performance

In Q3 2024, small-caps outperformed large-caps by 6%, but still trail them by -13% year-to-date. Value stocks followed this trend, outperforming growth by 7%, though they are down -6% for the year. Sector performance echoed this theme, with value and interest rate-sensitive sectors leading the way. Utilities (+19.4%), real estate (+17.4%), and industrials (+12.3%) were the top performers, while energy (-3.7%), technology (-1.0%), and communications (+6.0%) lagged. The base rate cut of 0.5% benefited these sectors initially, though lower rates tend to benefit equities more broadly over the long term.

International Equities: Solid Q3 Performance, but Longer-term Challenges

International equities also posted solid returns, with developed-country equity indices up +8% in Q3 2024. Though international equities outperformed U.S. equities for the quarter (+2.4%), they are still underperforming year-to-date by -7.5%. Foreign wars, economic instability, and currency effects have caused international markets to lag behind the U.S. for several years. In our Q2 2024 client newsletter, I predicted foreign equities could see some relative outperformance if the U.S. Fed began cutting interest rates. This prediction seems to have played out in Q3 2024 and may persist, though, over the long term, these performance trends are difficult to time.

U.S. Bond Market: A Strong Quarter

The U.S. bond market (Barclays Aggregate) had a strong Q3 2024, up 5.8%, driven by the 0.5% base rate cut and lower inflation trends. I won’t belabor the bond topic, but here are a couple of notable points:

1. Market duration (bonds with an average maturity of 5-6 years) outperformed short-term interest rate bonds (maturities of 1 year or less) in Q3 (5.8% vs. 1.4%). As base rates are cut further and/or economic growth slows, this trend could continue.
2. The U.S. Treasury yield curve un-inverted for the first time in 26 months. A normal sloping yield curve—shorter bond maturities yielding less than longer-dated bonds—is generally healthy for economic conditions.

Our Approach to Asset Management

It is impossible to predict which asset classes will outperform in any given year or when a significant market downturn will occur. As asset managers, we build diversified, multi-asset portfolios designed to withstand all environments and weather unforeseen storms, even during periods of heightened volatility such as election years.

Schedule a complimentary consultation and discover how our services can help you achieve financial success.