U.S. Federal Reserve authorities anticipate decreasing interest rates three times in 2024, as indicated by its recent summary of economic forecasts. This would mark the inaugural cut since the Fed diminished rates to unprecedented levels during the onset of the Covid-19 crisis. Therefore, investors in bonds and REITs are likely to reap the rewards. Additionally, those looking to secure rates on CDs can do so now.
With the U.S. Federal Reserve indicating it may be ready to cut interest rates in 2024, investors can already take steps to prepare. The bank's December projections showed the potential for three quarter-percentage-point reductions this year. This comes two years after the Fed began raising rates in March 2022 to control inflation, which has since dropped significantly. The central bank has not implemented a cut since the start of the pandemic, when it slashed rates to near zero to support the economy. Nevertheless, unpredictability surrounds the timing and scale of the potential cuts this time. Here's what financial advisors suggest investors consider ahead of 2024.
Advisors suggested that falling interest rates typically benefit the stock market. This is because businesses can secure financing for less, making them more likely to invest capital into their operations. It is unlikely that the S&P 500 will resemble its 2023 performance, when the index skyrocketed 24% in the year-end. That surge partially stemmed from investors betting that rates would remain low in 2024. As Charlie Fitzgerald III, a certified financial planner based in Orlando, Florida put it: "The stock market is the great anticipation machine."
Fitzgerald, a founding member of Moisand Fitzgerald Tamayo, pointed out that those who were trying to time the market may have already missed their chance. He noted that the gains occurred during the fourth quarter and that this doesn't mean growth is out of the question going forward. However, Fitzgerald warned against investing in the stock market in anticipation of the prices going up; this behavior is known as recency bias. On the other hand, Jenkin, the founder of oXYGen Financial in Atlanta and part of the CNBC Advisor Council, commented that technology stocks are the ones that are more likely to gain from the current low rates of interest.
Money stowed away in high-yield savings accounts, money market funds and certificates of deposit experienced a surge in interest rates. These rates are the highest they've been in years, though they're likely to sink when the Federal Reserve decreases borrowing costs. According to Jenkin, this might be the opportune moment to lock in CD rates presently available (which are still around 5%) in order to reap the highest benefit. Not much more interest is obtained on longer-term CDs (like those with a 5-year term) when compared to a one-year CD, so it would be wiser to select one with a shorter term.
The Fed's decision to raise interest rates took a toll on the bond market. This is because of an inverse relationship, where a rise in rates leads to a decrease in bond prices. This phenomenon was evidenced in the year 2022 which was the worst-ever year for U.S. bonds, as bond mutual funds and exchange-traded funds experienced a significant drop in share prices.
Should interest rates drop, advisors suggested that bond funds may experience a resurgence. Fitzgerald commented that in a situation of slowly sinking rates, there can be "a profitable gain in the bond market without too much risk". Jenkin noted that for those with an unwavering faith in a drop of rates, they may buy funds that have a higher maturity; these investments have the capability to be more worthwhile during a decline in rates, but also have a greater risk.
Jenkin stated that real estate investment trusts are likely to be successful in a declining interest rate environment. He stated that if one expects interest rates to go down, they should seriously consider investing in REITs due to the low borrowing costs. He recommended that such investments should be made in retirement accounts such as 401(k) or IRA to avoid tax on dividends. Fitzgerald advised investors to construct a diversified portfolio with adequate stocks related to age and long-term objectives. He stated that investors should remain disciplined and not get worried during market downturns.
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