The markets are rising, inflation is receding, and the Federal Reserve is signaling rate cuts are coming. What could possibly go wrong?
Randy Watts, senior portfolio manager at O'Neil Global Advisors, tells Investor's Business Daily's "Investing with IBD" podcast that Fed rate cuts often are a reaction to an economic slowdown. Markets tend to dip before bottoming out and performing better with lower rates.
Turns out, a good dose of realism goes a long way. Here are three things to watch as Fed rate cuts loom.
Expect Multiple Rate Cuts
A Fed pivot to dovishness is not likely to result in one single cut. "Interest rate changes by the Fed are like potato chips," he says. "They rarely can have just one, whether it's a hike or a cut." He says that once the Fed enters a new cycle and signals there will be rate cuts, investors should expect more to follow.
The Fed has recently signaled it will likely cut rates as inflation comes down and the labor market cools, but stopped short of committing to cuts. Fed chair Jerome Powell reiterated the Fed's focus on fighting inflation in recent comments.
Audio Version Of Podcast Episode
Any such rate cut translates into great news for stock returns. "When the Fed starts to ease and rates start to fall, that usually means the stock market is going to get a price earnings multiple expansion," said Watts.
Rates Meet The New Normal
Fixed income yields, meanwhile, have likely passed their peak. "We have likely seen the highs in bond yields for this cycle," said Watts. While they might not be at their peak, he says the new range for inflation and interest rates has permanently shifted higher, and investors are normalizing current rates.
"For fixed income investors and individuals, this is probably a good time to extend duration," said Watts.
Rate Cuts May Come, But Rises Aren't Impossible
While rate cuts might seem like certainties, Watts says declines are not uniform or even guaranteed. Despite all the good news for bonds and stocks, "it's not beyond the realm of possibility to get an inflation print that goes the other way," he said. Even if the cuts are coming, that doesn't mean that now is the time for buying. A lot of those changes were anticipated and "the market is very overbought in the short term," he warned.
Watts says both having a positive year and a downturn are not exclusive. "We've had a huge move in a very short period of time, and it would not be unusual for us to give some of that back," he said.
Follow Mike Juang on X at @mikejuangnews and on Threads at @namedvillage
