The Fed Got Aggressive, Now It's Your Turn

Well, it finally happened!

The Fed pivoted on its interest rate policy last week with an aggressive 50-point rate cut.

Investors have been anticipating rate cuts for some time now, so this wasn't exactly a surprise.

Hopefully, you weren't caught off guard either, since it's something we've discussed plenty of times here.

Surprise or not, it appears that we’re kicking this new chapter for the markets off with a bang. So there’s no time to waste!

Let's check in on how stocks reacted to the news and review some of my favorite sectors for falling rates.

The Market’s Reaction to the Rate Cut

At last week’s meeting, the Fed announced that it would cut interest rates by a whole 50 basis points.

Of course, investors saw this rate cut coming a mile away. Leading up to the meeting, the only question was whether it would be a 25-point or 50-point cut.

In the grand scheme of things, even the more aggressive outcome didn’t seem to matter much. What’s more important is that it marked the beginning of a new era for the markets.

Based on previous eras of easing rates, this trend will likely define the markets for the next few years.

In the short term, stocks have responded positively to the news. Both the S&P and Dow hit all-time highs the day after the rate cut.

As we’ve discussed before, lower rates make stocks in general more attractive as investors look outside of fixed-income assets for a yield.

So if you’re invested in the steady, income-generating stocks that we specialize in here, there’s a lot to look forward to in this new environment.

Here are a few specific areas that deserve your attention if you’re looking to put extra cash to work.

Rates Go Down, These Stocks Go Up 

First on my list are small-cap stocks. Small companies tend to carry a lot of debt to fund their growth, so lower rates make that debt less expensive.

As a group, small caps underperformed the broad market during the rate hike cycle. Now that rates are finally easing, I expect capital to rotate back into small caps.

Remember, we’re in the very early stages of this next cycle. And once they get going, small caps can outperform their larger counterparts for years.

Although small-caps aren’t exactly known for steady income, it’s a good idea to get exposure to this area of the market. 

Earlier this year, we added the small-cap company Cohen & Steers Inc. (CNS) to our portfolio. The stock is up over 30% since I recommended it and could have much further to go.

If you’re looking to get exposure to a basket of small caps rather than individual stocks, the iShares Russell 2000 ETF is another option to consider.

Precious metals like gold and silver also tend to do well as rates fall.

That’s because lower rates cause the relative value of the U.S. dollar to decline, acting as a tailwind for gold and pushing prices higher.

The yellow metal took off after last week’s rate cut, hitting a record high. And this is just a small preview of what’s to come.

Gold miners from our portfolio like Newmont Corp. (NEM) and Barrick Gold Corp. (GOLD) are natural beneficiaries of this trend.

And finally, utilities are likely to see renewed interest as rates fall. They may not be the most exciting investments out there, but that’s actually part of the appeal.

As I mentioned earlier, lower yields on fixed-income investments like bonds will make stocks more competitive. 

Utilities, which are known for their reliable income streams, are a great alternative for risk-averse investors looking for a safe yield.

Like small caps, utility companies also rely heavily on loans to finance their expansion. So lower borrowing costs provide another tailwind for utilities. 

That’s why I expect companies like NextEra Energy Inc. (NEE) will do especially well over the next few years.

We may still be in the early stages of the rate-cut cycle. But I’d encourage you to get exposure to these three areas now before they head even higher.