THE RATE CUTS ARE COMING!

THE RATE CUTS ARE COMING!.........What do I do with cash?

While the impending rate cuts are certainly not going to invoke the consternation and angst experienced by the New England town in the fictional 1966 movie pictured above, confusion about the best course of action with one’s investment portfolio may be well founded.  With main street bearing the brunt of the pain from the current policy of higher interest rates in the form of higher rates for auto loans and credit cards, rate cuts would be welcome, IF, prices of goods and services do not rise substantially.  With the current administration preferring to ease heading into the election, the Federal Reserves’ pre-determined path of easing appears likely to happen within the next 6-12 months.  Still, the strong job market and inflation data that hangs around like a gnat at a summer barbeque, keeps pushing rate cut expectations further out the timeline. 

Note: Fed Fund Futures are publicly traded futures contracts that reflect the collective marketplaces view on the direction of the Fed Funds rate over time.

What does the past tell us about asset performance around rate cuts?

With interest rates priced lower when rate cuts occur, reinvestment risk into investments with lower paying rates is the first drawback to investors.  Certainly, this will hit close to home as many individuals had put money into cash and cash-like savings at rates not witnessed for quite some time.  But when we look at other investment options coinciding with the Federal Reserves’ first rate cut following a tightening cycle, we found some interesting observations. 

• US Treasury rates, to no surprise, drop considerably on average. 
• Investment Grade bonds appear to be the most consistent performer on average.
• Equity performance generally sags during the immediate aftermath of the 1^st cut.
• Crude Oil typically spikes up then drops, only to rebound.
• Gold, on average, pops at first, drops a bit, only to rebound to the best of listed assets 6 months out.

The table below shows average forward returns following the first Fed rate cut to begin an easing cycle going back to 1989.  While most would have assumed equities would have had strong performance, the data shows muted returns.  In fact, if we expanded the time frame back to 1974, the average 3-month forward S&P 500 return post the 1^st cut is close to negative 2%.

Source: Bloomberg LP and Strategas Asset Management, as of May 13, 2024

Exploring some alternative to cash and cash equivalent investments, and, with the above in mind, we believe a portfolio consisting of gold, investment grade bonds or a more balanced equity portfolio should be considered.  At Strategas Asset Management we believe we offer many excellent options for your clients or your portfolio:

Available to Advisors and Professional Wealth Mangers:

The Strategas Fixed Income Go Anywhere Strategy & the Strategas Core Fixed Income Strategy  - are two actively managed, multisector enhanced total bond SMAs strategies managed by Tom Tzitzouris.   In anticipation of the impending slowdown of quantitative tightening (QT), and the end of tax season, with its accompanying liquidity drain, Tom had previously increased his duration exposure within both portfolios in a tactical move.  With this news now priced into the bond market, and with recent data showing economic growth slightly sluggish and the latest consumer price index (CPI) in the rear-view mirror, he is taking profit on some of those positions, (decreasing longer duration exposure).

The Strategas Blue Chip Opportunities Portfolio  was constructed on the idea that in times of market stress, investors would seek to shelter capital in the domestic equities that were perceived by the market to have comparable sovereign-like features, specifically low credit default swap (CDS) prices.  While growth stocks may be on most people’s mind set currently, particularly if low rates provide opportunity for low corporate earners to expand their business, we would keep in mind the historical equity performance when the Fed begins to ease.

The Strategas Dividend Growth Portfolio  invests in companies exhibiting consistent dividend growth with above average dividend yield.  We believe this could provide an alternative for those who remain in search of alternative yield producing via dividend payers.

The  Strategas Asset Allocation Strategies offers a full suite of varying risk sleeves for those looking for a managed product across all asset classes.  With each sleeve invested according to varying degrees of perceived risk, the portfolios encompass the full range of Strategas Securities analysis into the macro backdrop and the impact across portfolios.

Available to all investors:

The Strategas Macro Thematic Opportunities ETF (Ticker SAMT) is an actively managed ETF which invests in 3-5 macro themes at one time.  With the portfolio not tied to any particular benchmark or index it we are able to shift the portfolio opportunistically in times of market stress.  The four current portfolio themes of Downside Protection, Cash Flow Aristocrats, De-Globalization, and Artificial Intelligence were not just selected due to our belief they are the most impactful themes today, but also with a balanced approach to portfolio construction inclusive of gold as we head towards the beginning of an easing cycle.

The Strategas Macro Momentum ETF (Ticker SAMM) is our latest ETF offering which is a tactically managed active ETF.  With the macro momentum and current macro backdrop heading towards likely rate cuts, the portfolio has been positioned accordingly based on our believed likely path for stocks in near term macro environment.

For additional information on Strategas Asset Management, how to access our research or our other investment solutions please visit our website: https://www.strategasasset.com/