For all the nail-biting about the economy over the past year, investors had it easy: a 5% yield on short-term U.S. debt, one of the safest investments in the world.
Now, the times they are a-changin’—again. The Federal Reserve on Wednesday lowered its benchmark rate by a half-point, capping a more than two-year effort to curb inflation with elevated interest rates. Officials penciled in a series of additional cuts in the coming years.
That shift away from a world of 5% yields is already rippling through markets. We asked five investors where they are moving money and how to avoid danger in a new era of falling rates.
Saira Malik
Like many others watching the Fed’s rate-hiking cycle in recent years, the Nuveen chief investment officer had expected the U.S. economy to tip into recession by now. Instead, inflation has gradually decelerated this year, and the labor market only recently began to cool.
Even if Fed cuts now suggest officials are wary of a slowdown, Malik said it might be a while before the stock market feels any real pain. It would take time for weaker hiring and consumer spending to affect many businesses’ bottom lines.
“If you look at history, even if the Fed is cutting rates because a recession is coming, markets actually remain relatively strong for equities for the next 12 months,” said Malik, whose firm manages roughly $1.2 trillion in assets.
While stocks have broken records this year, thanks to an artificial-intelligence-driven mania on Wall Street, investors have earned cold hard cash from holding trillions of dollars in Treasurys, money-market funds and certificates of deposit.
“As the Fed cuts rates, that return on your cash will deteriorate,” Malik said. “And I think that money will need to move back into the market.”
Malik is eyeing fixed-income opportunities where investors can lock in reasonably high yields for relatively low risk, such as municipal bonds. Companies that have a record of pumping out more dividends over time also tend to perform better during rate-cutting cycles.
Malik believes timing the market is a fool’s game, yet she still believes a recession is coming sometime down the road. If that pans out, Malik said, “You want to be up the quality curve and make sure the fundamentals of anything you own are strong enough to survive a downturn.”
Rob Arnott
The founder of the advisory firm Research Affiliates is skeptical of the economic modeling that feeds into the Fed’s decisions about monetary policy. After overly optimistic rate-cut projections early this year, he is also skeptical of the market’s ability to forecast how quickly the central bank will ease borrowing costs that help dictate the rates on loans of all types.
But Arnott, like everyone else, still lives in financial markets that hang on the Fed’s every move. In that world, he believes the delayed and unpredictable impacts of recent years’ rate increases on corporate investment might become more apparent before expected rate cuts take hold.
“The risk of a hard landing is still there,” Arnott said, adding that a slowdown isn’t his base case. “So I would be cautious, not because the Fed is cutting, but because the Fed already raised [rates] too far and held for too long.”
Does that mean investors should throw money into sectors of the economy that are most sensitive to interest rates? “No, because the market is already expecting that and has already priced that in,” Arnott said. “You want things that are cheap. You want things with a good yield.”
That means stressing value over growth and giving a closer look to non-U.S. stocks, he said, as bond markets in developed economies abroad haven’t flashed recession signals as brightly as they have stateside.
“They’ve already had their economic slowdown,” he added, “so they may very easily not face a hard landing.”
Richard Bernstein
Bernstein made a name for himself earlier in his career in part by analyzing corporate profit cycles as they relate to stock-market leadership. These days, leadership has been confined to the Magnificent Seven group of tech giants, even as profits among many other companies have accelerated.
“A lot of [2023] and a lot of [2024] has shown that there is still too much speculative liquidity in the economy,” said Bernstein, a former Merrill Lynch strategist who now runs Richard Bernstein Advisors.
“On one side of the seesaw we’ve got these seven stocks and all the speculation that’s gone along with it,” he added. “And on the other side of the seesaw you have everything else in the world…. We’ve been positioned on that other side of the seesaw.”
Bernstein’s macro firm is optimistic about small and midsize companies. “Normally, when profit cycles are accelerating, the Fed is hiking rates,” he said. “We’re about to experience a period where the profit cycle will accelerate and the Fed will be cutting rates.”
His hope is that the policy change will push more money to increasingly profitable businesses tied to more cyclical sectors of the economy, such as manufacturing, finance and discretionary goods. The risk, in his view, is that investment will instead veer toward more speculative bets.
“My argument is that if [new capital] does flow into cryptocurrencies, into the Mag Seven, that is ultimately inflationary,” he said. “We allocate capital to where it’s not needed, and we don’t allocate capital to where it’s needed in the economy. By undercapitalizing what you need, you disrupt normal supply and demand, and you cause inflation.”
Katie Nixon
Northern Trust Wealth Management’s clients range from individuals investing to fund their current lifestyles to those planning for intergenerational transfers of wealth. With either short- or long-term goals in mind, “Hiding in cash has been safe,” said Nixon, the firm’s chief investment officer. Picking which stocks to buy now, less so.
“I’m not sure that money sitting on the sidelines is necessarily going to be geared toward adding risk assets,” Nixon said. “Looking back in history, we do see rate-cutting cycles characterized by more equity volatility.”
Economic uncertainty in recent months has thrust the stock market into occasionally violent spasms after years of tranquility. Nixon’s advice: Forget flashy growth stocks in favor of consistent returns from the likes of pharmaceutical and healthcare companies. At the same time, reduced borrowing costs could open up opportunities in capital-intensive investments such as global real estate and infrastructure.
“Lower rates and a soft landing are a sort of nirvana for these rate-sensitive assets,” she said.
Although price pressures might be receding now, investors would be wise to hedge against future shocks. Treasury inflation-protected securities, where payouts are linked to the consumer-price index, offer a cheap form of insurance as markets navigate an uncertain outlook.
“Right now, our premise is that we’ll continue to see slower but not too slow growth in the economy,” she said. “Frankly, we’re sort of glad to see the heat come off the labor market because that was a key ingredient in getting inflation down.”
Jack Ablin
Cresset rode the AI wave like many firms that passively invest in stock indexes. Unlike some others, however, it began offering floating-rate loans directly to midmarket companies such as manufacturers. That private-credit offering recently yielded a healthy 12.5%, thanks in part to elevated interest rates, said Ablin, Cresset’s chief investment officer.
Those returns could shrink depending on the pace of Fed cuts and how markets react to any economic jitters that jeopardize companies’ abilities to pay off loans. “Where we would get concerned is if we saw credit conditions deteriorating,” Ablin said.
Ablin is among investors who believe falling interest rates will shift money within the U.S. stock market from tech giants toward smaller players more sensitive to borrowing costs. He also expects Fed cuts will reorient the global flow of capital by weakening the U.S. dollar against foreign currencies, boosting international stocks.
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Last year, Cresset leaned into Japan, where the yen recently fell to its lowest level versus the greenback in 38 years. “Once you invest in foreign markets,” Ablin said, “You’re not only investing in the local equities, but you’re also investing in the currency. At some point, get the yen to normalize a bit, that could be a one-two, double whammy to the upside.”
That sort of normalization can also create turbulence, as seen in August, when the unwind of a popular bet on a weak yen jolted markets. Another reason for caution: GOP presidential nominee Donald Trump’s promise to increase tariffs on foreign goods could scramble trade flows and threaten foreign companies’ bottom lines.
“I’m not sure I would venture too far into international [investments] until I understood what the White House looks like,” Ablin said.
Write to David Uberti at david.uberti@wsj.com
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Appeared in the September 21, 2024, print edition as 'Five Wall Street Pros’ Plans for Falling Rates'.
