Investors May Have Already “Priced-In” a Rate Cut

After Fed Chairman Jerome Powell more or less promised a rate cut yesterday, investors are left with the same question as before:

When the heck is it going to happen?

Economists expect the next rate reduction to come in July, while the futures market believes a full quarter-point decline is in the works.

At least, when Powell eventually announces it.

“I think they’re fully planning on cutting in July, absent stronger data,” remarked Ed Keon, QMA chief investment strategist.

“The market liked it now, but it’s important to keep in mind, rate cuts are not a magic wand. There is clear evidence of weakening of economic conditions.”

After all, “weakening conditions” are why the Fed is even considering a rate cut in the first place. Back in the 80s, rate cuts were met with bearish sentiment. It meant that the economy and markets needed artificial help to continue prospering.

To most investors, that was nothing to celebrate.

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But ever since the first round of quantitative easing (QE) after the 2008 financial crisis, the script has been flipped in a big way.

Now, investors love rate cuts, because they know corporate debt is about to get a whole lot cheaper.

And that boosts bottom lines across nearly every industry – making almost every stock more valuable in an instant.

However, investors need to be careful here. As several analysts have warned now (myself included), the market may have already priced in the benefit of a July rate cut. Everyone’s a headline-seeking-trader these days, and over the last few months equities have been dominated by knee-jerk reactions.

A Trump tweet about tariffs, for example, kicked off a huge early May correction, only to be followed by some extreme interest rate optimism just a few weeks later – bringing stocks all the way back up to where they were in April.

At this point, though, nearly everyone thinks a July rate cut is in the cards and they’ve bought up equities accordingly. Should Powell announce that the Fed will indeed slash rates a month from now, the market might not rise as much as some investors are hoping it will.

But that doesn’t mean you still can’t profit off a lower-rate investing environment – something that seemed almost inconceivable as of a year ago.

High-yield, interest rate sensitive dividend stocks could become even more popular this year should rates get a reduction, and it’s something that investors looking to “play” the next rate cut may want to consider.

After all, if debt becomes cheaper, dividend yields will rise. That’s especially true for utilities, telecom companies, and real estate investment trusts (REITs), which carry some of the heaviest debt loads in the market.

And yes, I know what you’re thinking…

It’s true that investors will undoubtedly glob-on to tech stocks like they normally do when the going is good.

But outside of the red-hot software (and semiconductor) firms, there’s still plenty of opportunity to be had by investing in companies that are more interest rate sensitive than others.

Better yet, there’s several high-yield REITs that have yet to join the rally that started earlier this month.

Still, though, before you get too excited, keep in mind that a July rate reduction isn’t guaranteed.

“They’re setting us up for a rate cut, but who knows when,” cautioned Peter Boockvar, chief investment strategist at Bleakley Advisory Group.

“If the data weakens, they’ll cut in July. If it stays steady or gets better, they won’t. People should understand if they’re going to cut it’s because the market data got worse. […] This is showing the market focus is on the cuts but not on the reason for the cuts.”

As usual, investors (along with Wall Street) are counting their chickens before they’ve hatched.

If they’re not careful and end up re-buying the hype over the next few days without an official announcement from the Fed, they’ll end up with egg not only on their face, but their portfolios as well.

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