The Federal Reserve cut its target for the Federal Funds Rate by 50 basis points on Wednesday to a range of 4.75% to 5.00%. A small majority of Fed officials also favored additional cuts of 25 basis points in November and December. with The Fed signals that rates will be cut for months and its first cut comes later than expected, with many financial advisors adjusting their portfolio allocations months ago.
However, with the downward movement finally happening, WealthManagement.com contacted some advisers to find out if they were taking additional measures or making new recommendations to clients. Some common themes among their strategies so far have included growth exposure to stocks and long-term bonds.
According to Gary Quinzel, vice president of portfolio advisory at Minneapolis-based Wealth Enhancement Group, an RIA with more than $85 billion in AUM, the cut and direction for future cuts were in line with expectations.
Wealth Enhancement Group had already adjusted its fixed income allocations in anticipation of the new rate environment.
“We have long used a leveraged strategy for Treasuries. Now we've moved away from the short end and we're looking to maintain duration,” Quinzel said. “With investment-grade credit, there's a lot of flow and some opportunity. We like duration. We like to see opportunities on the steeper end of the yield curve. .We had spent some time looking at leveraged loans a few months ago, and they're based on variable rates, and that's not as interesting an area anymore.”
Quinzel added that the rate cut should also be positive for stocks.
“The market will bounce around a bit as we analyze the components of what Powell is saying, but we're pretty bullish on stocks,” he said. “We continue to like American stocks and high quality. We've moved away from growth to focus more on the S&P 493, as you can tell. At the same time, we are maintaining our overall exposure to US growth stocks.”
Barry Gilbert, portfolio manager at Omaha, Neb.-based RIA Carson Group, with $37 billion in AUM, also noted the importance of longer-dated bonds.
“Markets tend to be forward-looking, and we have traded around anticipated cuts during the year while increasing the interest rate sensitivity of our bond portfolio,” Gilbert wrote in an email. signature added some exposure to long-term Treasuries last November and it is keeping short-term bond positions to a minimum. “The anticipated move toward rate cuts also supported our continued overweight on stocks.”
In an investor note, Jeff Buchbinder, chief equity strategist at LPL Financial, looked at how stocks have historically performed after initial rate cuts.
“On average, value stocks slightly outperformed their growth counterparts three and six months after the initial dip, but growth outperformed 12 months later,” Buchbinder wrote. “The 1995 cycle looks more analogous to where we are now. In the 12 months after that cut, growth was slightly better, but value had an edge in the first six months.”
Buchbinder also found that defensive sectors tend to perform better in the first months after a cut.
“This was particularly evident during the comparable period of 1995 which included a soft downturn and technological build-up,” he wrote. “Healthcare and the defense telecom services sector (before digital media added to the sector overhaul) were the top performers, while consumer products and utilities also outperformed. (LPL Research upgraded healthcare to neutral this month, it is a key element of the neutral consumer and recommends overweight communication services.)”
John Lynch, chief investment officer for Comerica Wealth Management, which has $2.4 billion in AUM, added: “We look for traditional beneficiaries, including small-cap, value, cyclical sectors and the equal-weight S&P 500 Index, to experienced the last winds”.
RFG Advisory, a Birmingham, Ala.-based RIA. with $3.8 billion in AUM, has also recommended that clients add duration to their fixed-income portfolios for several months, according to Rick Wedell, president and CIO. He noted that some longer-dated securities should offer clients additional protection if the economic downturn is not as mild as expected.
“The single biggest issue that rate cuts will have on the portfolio is actually the macro effect,” Wedell wrote. “Is the Fed that far ahead of the curve to be able to come down to 3.0% or 3.5% in fed funds before unemployment gets too high?
“On balance, we could see a shift from short-term to long-term fixed income as the rate cut is now 'official',” he added. “The reality is that most of these types of moves should have been assessed by now, given the widely expected nature of these cuts. In the longer term, the Fed signaled 100 basis points of easing this year and another 100 next year, meaning we won't be going back to a 'neutral' rate for a long time. This means short-term yields could remain above long-term Treasury values for the next 12 months or more. So the move from the short-term to the long-term can be gradual.”
Philip W. Malakoff, executive managing director and director of research with First Long Island Investors LLC, a Jericho, N.Y.-based wealth management firm with $1.5 billion in assets, said the firm began increasing duration in its portfolio with fixed income about a year ago based on anticipated interest rate cuts, focusing on 10-year bonds. Since lower rates tend to favor stocks, First Long Island Investors has also slightly increased its equity exposure and rebalanced some client portfolios, moving money from large-cap to small-cap and other types of stocks. .
Malakoff added that now might be a good time to invest in some value stocks. “Value stocks, especially dividend-paying and dividend-growing companies, tend to do better in a lower interest rate environment as they attract cash redistributed from fixed income.” He cited real estate holdings, including REITs, as assets that could benefit from lower borrowing costs.
This is a developing story that will be updated as more feedback comes in from tipsters.