Much has been reported about the Federal Reserve’s reducing interest rates by 50 basis points, lowering the federal funds rate to a range of 4.75% to 5%. The move represents a pivot from the past two years of rate hikes, which were designed to combat inflation, and signals the Federal Reserve’s conclusion that inflation — down to 2.5% from a peak of 9.1% in mid-2022 — is now under control.
Does the Fed’s move warrant any substantive shift in your overall investing strategy? For our Park Piedmont clients, we would answer: probably not.
Unquestionably, the Fed’s rate reduction will have some impact on varying asset classes.
For savers, the 5-percent-plus yields on money market funds, available over the past couple years, will shift downward. Nevertheless, there may well be a continuing role for investing in cash equivalent money market funds in light of each of our client’s particular circumstances – even though the yields will turn lower.
For bond investors, falling interest rates mean that available yields will decline. Going forward, as new bonds are issued at lower rates, the extent of interest income to be earned will decline somewhat for savers. But the news isn’t all bad, since falling interest rates mean the price of existing bond prices will rise. (Recall that by contrast, when interest rates are rising, bond prices decline.)
For riskier assets like stocks, there is an oft-repeated consensus that stocks tend to perform well after interest rate reductions. That’s because when the Fed reduces rates, one of its objectives is to make borrowing less pricey for consumers and businesses alike, boosting economic productivity. But a recent study by Morningstar cautions investors, noting that “the last four major rate-cutting cycles show why it’s challenging to draw sweeping conclusions. Market performance can vary dramatically in the year after a new [Fed-initiated] easing cycle starts.”
At Park Piedmont, our approach to investing relies on developing an appropriate asset allocation based on each of our clients’ particular circumstances, with a focus on your goals, risk tolerance, and the time horizon for use of your financial assets. Shifts in fiscal policy and accompanying changes in investor sentiment are inevitable for investors, and typically do not call for any adjustment in overall asset allocations.
What might warrant possible rebalancing?
Perhaps your need for the use of your money has changed – either you need money sooner or later than originally anticipated when establishing your asset allocation. Or perhaps you recognize that your emotional tolerance for risk and volatility has changed. Or perhaps the movement of market prices has altered your initial asset allocation significantly enough to justify restoring your asset allocation to its original position.
In any of these cases, your Park Piedmont advisors are here as helpful resources. If you have questions, don’t hesitate to reach out.