5 minute read

The US Federal Reserve (Fed) is poised to kick off its interest rate cutting cycle next week, with traders now viewing a cut on 18 September as a near certainty. The only question left is by how much: 0.25 or 0.5 percentage points (pp)?

Either way, it's a huge deal: falling interest rates will affect the economy, and your portfolio, in a number of ways. Here's what you need to know.

When will interest rate cuts come?

Last week’s job market report was the last major insight before the Fed’s decision. The US created 142,000 new jobs, higher than July’s 89,000, but lower than the predicted 161,000. Unemployment figures softened the blow, easing from July’s 4.3% to 4.2%.

It’s a mixed bag of results, but it seems the market is now pretty much set on a 0.25 pp rate cut on 18 September. Based on prices in the futures market, traders expect two 0.25 pp cuts and one 0.5 pp cut by year-end (the current target US interest rate is 5.25–5.5%).

What does this mean for my portfolio?

Stocks: Rate cuts are generally a boon for stocks – lower borrowing costs spur business and consumer spending, while less attractive yields prompt investors to shift away from cash equivalents to riskier assets. But their impact can vary depending on the economic context; in a “soft landing” scenario, where inflation is brought down without triggering a recession, rate cuts have had a stronger effect.

Bonds: As we covered in our recent CIO Insights, interest rates have experienced a “reset”, now at their highest levels in nearly 25 years – great for income seekers. And when interest rates fall, existing bond prices rise, because they still pay out at the previous, higher rates. This is why "locking in" high yields now can be advantageous – you're securing a favourable rate and positioning yourself to benefit from capital appreciation. For an easy way to invest in global bonds, check out our Passive Income portfolio template.

What’s the takeaway here?

While it’s important to understand how markets can shift in the nearer-term, the key is sticking to a strategy that lasts. Our analysis of 21 cycles of Fed easing shows that returns across all major asset classes bounce back given time, with bonds leading and equities following.

Having a diversified portfolio that’s tailored to your risk appetite acts as a net, capturing opportunities across various asset classes (it’s what our General Investing portfolios are designed for). By staying invested with it, you position yourself to make the most of every market cycle – rate cuts included.

🎓 Simply Finance: Futures market

When analysts say "the market is expecting" a certain event, they're not just talking about general sentiment. Often, they're referring to data – for example, prices in the futures market.

Futures are contracts to buy or sell something at a specific price on a future date. Traders buy and sell those contracts based on their expectations. As more bets are placed on a particular outcome (like an interest rate cut), prices shift, reflecting what the market collectively expects.

💼 Data in Brief: 9–13 September

• Monday: China inflation
• Wednesday: UK GDP, US inflation
• Friday: US consumer sentiment

The latest US inflation data showed a slight uptick in core CPI, as disinflation in goods prices was offset by a pickup in stickier services costs. This suggests the Fed may opt to kick off its rate cut cycle next week with a more cautious 0.25 pp cut.

But even more important than how much the Fed cuts is that it starts to cut, alleviating pressure from a prolonged period of high borrowing costs. For investors, history shows that the onset of rate cut cycles tends to have a positive impact across various asset classes over the long term, as illustrated in our chart above.

- The StashAway Investment Team

🗓️ Save the Date

We’re excited to invite you to the second session of our Wealth-building webinar series: "Growth strategies for your financial goals."

Join us as we share essential insights and break down the basics of creating a diversified investment portfolio to help you achieve your financial goals. 

In this webinar, we’ll uncover:

• Techniques for setting clear, achievable financial goals that align with your life plans
• Insights on understanding diversification and different asset classes
• Practical strategies to move from saving to smart investing

Whether you're looking to buy your first home, plan for retirement, or just grow your nest egg, you'll walk away with actionable strategies to confidently take the step in long-term wealth building.

⬆️ Give your cash the upgrade it deserves!

Unleash the power of your savings with our ultra-low-risk cash management portfolio. 

Enjoy a projected 3.6%* p.a. return without the hassle of lock-in periods or minimum investment amounts. 

Whether you’re building up your emergency fund, saving up for an upcoming expense, or putting aside funds to dollar-cost average into your investment portfolios, Simple keeps your cash secure in even the most volatile market environments. 

Start today and transform any amount into an earning opportunity – because it's that simple.

* The projected rate is not guaranteed and is as of 31 July 2024. It is based on the Gross Yield provided by the fund manager.

StashAway Simple™ is only available on your mobile app. Find out more about it here