It may be time to reconsider popular portfolio strategies for a lower interest rate environment.
The Federal Reserve cuts interest rates by half a percentage point Wednesday marked the first time in more than four years that the bank cut its benchmark interest rate. Investors should start thinking about how the changing macro environment will affect their investments in the coming year, according to VanEck CEO Jan van Eck.
“Investors should look at their equity book and ask themselves, ‘How should I build that book to get through next year’s cycle?’” he told CNBC.ETF Edge“last week. “Buying the S&P alone is a dangerous strategy right now.”
The S&P 500 closed 1.4% higher for the week, while small-cap Russell 2000 up 2.1%. Jon Maier of JP Morgan Asset Management thinks the latter index’s outperformance could extend as interest rates fall.
“We’re going into an easing cycle, so small caps will benefit from lower interest rates,” said the firm’s chief ETF strategist.
But it’s not just equity strategies that experts are suggesting a rethink. Investors may also start cutting back on their cash holdings. While the average return for the 100 largest money market funds remains above 5%, according to Crane data As of Friday, Maier expects to see some of that money flowing back into bonds.
“Fixed income is the area that’s seeing a lot of inflows right now because of the interest rate environment, and that’s likely to continue,” he said. “There’s about $6.5 trillion in money market funds, a lot of that will flow into longer-term fixed income or some of it into other areas of equities.”
With interest rates finally starting to fall, van Eck points to the federal deficit as the next potential challenge for markets. He sees reasons to stick with some of the popular hedge portfolios amid a broader repositioning.
“Can the government continue to stimulate the economy and spend more than it takes in in taxes? Our answer is that it would cause a lot of instability. Yellow And bitcoin are great fences for that purpose,” said van Eck.
