What to Know After the Fed Rate Cut Announcement

A week ago, the Federal Reserve cut interest rates by 0.25%, as expected. What should investors know after this Fed rate cut announcement? What’s happened in the markets, what are experts watching, and how should people invest moving forward?  

The fact that the Fed cut rates “as expected” is notable. The market outcomes have proven to be nothing more than a verification of already baked-in results. Think of it this way: Just as peeking at a birthday present ahead of time dulls the impact of opening it, the markets preemptively acting on the Fed rate cut announcement lessens the effect, making the benefits appear questionable right now.  

What should investors keep an eye on moving forward (or trust their advisory team to keep an eye on)? 

After the Fed rate cut announcement, our Investment Management Team is watching three things.  

1. Labor market trends that indicate softening 
2. Immediate signs of reigniting inflation expectations as “would-be” homebuyers flood the housing market
3. The 2-year bond yield 

On the last point, if there is an increase in yields in the weeks after the announcement, inflation risks are likely underpriced. In other words, since higher yields equate to lower bond prices, an increase in the 2-year yield would indicate the market is playing the “buy the rumor and sell the news” card, where investors bought in anticipation of an event — the Fed rate cut announcement — only to sell after the event, causing security values to fall, even if the news is expected or considered positive.  

If that scenario plays out, bonds will carry more risk than stocks over the next 12 months, and investors should be careful with longer-term bonds. 

The fact that experts are watching for specific signals after the announcement should not be alarming. If anything, Credent clients can feel confident that their team is aware of the potential impacts of a Fed rate cut announcement and prepared to adjust.  

In light of the Fed rate cut announcement and other economic indicators, how should investors position themselves moving forward?

First, in the equity market, remain focused on company fundamentals, such as healthy balance sheets, robust cash flow, strong profitability metrics, and valuations, etc., as this is likely to provide more controlled risk than the broader market, especially if we see the 2-year bond yields increase. 

In addition, investors should consider moving away from allocation structures heavily dominated by a handful of mega-cap stocks and more into equal-weighted factors, where every company has the same weight or impact. For context, the expected return profile of the top 10 names in the S&P 500 over the next 12 months is roughly 7%. The equivalent expected return for the bottom 490 is sitting at nearly 12%. This is the first time in almost a decade where we anticipate such a wide discrepancy.  

Our Investment Management Team sees this gap as an indication that the AI play may cool down. In other words, diversifying away from conventional-wisdom AI themes is a solid approach to a better risk-adjusted profile. Such a profile could create an improved expected return while reducing concentration risk.  

Finally, on the macro front, consumers remain strong. Despite tariffs and trade wars, people keep spending and company earnings have easily beaten expectations. This highly unusual response is a fantastic example of the risk associated with missing upside. Investors are often engulfed in the downside-risk discussion, but they rarely focus on the risk of missing upside. It can be just as risky to be too cautious as it can to be too bold.  

Ultimately, regardless of market and economic circumstances, stay invested, follow your financial plan, and lean into professional expertise when you need it.  

For more guidance on responding to a Fed rate cut announcement, reach out to our team using the form below.