Lana B. from Florence, AL asks: Hello Mitch, I’ve been reading everywhere that the Federal Reserve is expected to lower interest rates a few times this year. Are there any smart money moves you’d recommend in anticipation of these rate cuts? Thank you and Happy New Year!
Mitch’s Response:
Thanks for emailing me, Lana! You’re asking a great question.
Indeed, in the Federal Open Market Committee’s (FOMC) December meeting, we learned that the Fed is projecting their benchmark Fed funds rate would end this year in a range between 4.5% to 4.75%. Since rates are currently at 5.25% to 5.5%, the implication is that Fed funds would fall by 75 basis points, which could mean three rate cuts throughout the year. Assets across capital markets seemed to welcome this news warmly, as both stocks and bonds rallied in December.1
As I’ve written before, I’m reluctant to offer you any specific advice without knowing your financial situation, risk tolerance, and growth/income objectives specifically. But what I can do is offer more general ideas about money moves in an environment where the Fed is cutting rates.
How Can You Manage Market Volatility?
During periods of uncertainty, many investors may be tempted to sell stocks in an attempt to safeguard against potential losses. However, selling during times of high volatility often cements losses, as market changes are unpredictable and can rebound later.
In this market, I suggest developing a mental approach for dealing with volatility. Our guide, “Helping You Manage Market Volatility,” provides insights and tips to do just that. Get answers to questions like:
- Market downturns can and will occur, but what should you do?
- How can diversification help you manage volatility without compromising your returns?
- When volatility is too much for you to handle, how can a money manager help?
- Can volatility actually be an opportunity?
If you have $500,000 or more to invest and want to get answers to the questions above, click on the link below to download this guide today!
Download Zacks Volatility Guide, “Helping You Manage Market Volatility.”2
Let’s start with cash and cash-like instruments, like CDs, money market funds, and high-yield savings accounts. As many readers know, yields on these accounts and instruments rose across the board in 2023, with many risk-free or low-risk securities paying ~5% annually on cash. For older folks or those in retirement, this development marked a sharp contrast to what many experienced in the past decade.
With the possibility of rate cuts in 2024, I think it’s quite possible that the yield on CDs and high-yield savings accounts could come down, so it might make sense for investors to consider locking in these high rates now. I generally recommend that people keep about one year’s worth of income needs in cash, as a form of emergency savings. An idea would be to keep six months’ worth of cash in a high-yield savings account, and 6-months’ worth of cash in a short-term CD. Rates on both of these instruments are attractive at the moment, relatively speaking.
The fixed-income market may also present some opportunities, on the shorter end of the curve. It’s possible that rate cuts could ease pressure on Treasury bond yields, and holders of those bonds would benefit not only from the coupon but also from rising bond prices in the event of falling rates. In a diversified portfolio, where fixed income is used for income and to reduce volatility, I think 2024 could prove a nicely positive year.
In terms of stocks, falling interest rates reduce the discount rate on future cash flows, which may factor as a tailwind for growth-oriented stocks, like technology names. Lower interest rates also help businesses by reducing borrowing rates, which can increase investment activity and help drive future growth. Every investor’s exposure to stocks depends on their growth objectives and risk tolerance, but falling rates generally speaking tend to be good for stocks, not bad.
To prepare for what’s to come, I recommend that investors develop a mental approach to dealing with volatility and market changes.
Our Volatility guide, “Helping You Manage Market Volatility3,” will provide you with insights and tips to do just that. Get answers to questions like:
- Market downturns can and will occur, but what should you do?
- How can diversification help you manage volatility without compromising your returns?
- When volatility is too much for you to handle, how can a money manager help?
- Can volatility actually be an opportunity?
If you have $500,000 or more to invest and want to get answers to the questions above, click on the link below to download this guide today!
Disclosure
1 CNBC. January 3, 2024. https://www.cnbc.com/2024/01/03/the-fed-could-cut-interest-rates-in-2024-how-investors-can-prepare.html
2 ZIM may amend or rescind the guide “Helping You Manage Market Volatility” for any reason and at ZIM’s discretion.
3 ZIM may amend or rescind the guide “Helping You Manage Market Volatility” for any reason and at ZIM’s discretion.
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