Navigating Interest Rates Moves: Investing Strategies for the Incoming Downturn – The Average Joe
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    Navigating Interest Rates Moves: Investing Strategies for the Incoming Downturn

    Noah Weidner

    June 13, 2023

    Insight

    Investors have found themselves standing at a crucial crossroad. 

    • The federal reserve (Fed) is expected to pause interest rates with the possibility of raising rates again if inflation doesn’t fall as expected. 
    • Economic indicators are also signaling a recession and potential for the Fed to lower interest rates.

    While it may seem counterintuitive to think about interest rates coming down when the Fed is seemingly keen on raising them, it’s crucial to remember that the financial landscape is constantly changing.

    How can investors position their portfolios? Let’s dive in.

    Zoom In

    The current economic scenario has led to an unusual situation where the risk-free return rate (US 1 year treasury bill at ~5%) appears more attractive than potential market returns (S&P500 multiple at ~19x, implying a 5.25% return).

    In such an environment, some strategies to consider include:

    1/ Reducing market exposure: Considering the risk-free rate offered by US treasury bills, you might want to reduce exposure to equities and park some funds in these low-risk assets.

    2/ Defensive sectors: When a recession hits, money managers often pivot to more stable sectors like consumer staples, utilities, and healthcare, rather than completely liquidating their equity holdings.

    1. Consumer staples: These are businesses like Pepsi, Unilever, and Walmart that provide essential items that consumers need irrespective of the economic climate.
    2. Utilities: Companies like Bell and Waste Management provide essential services and often have stable cash flows, which make them attractive during economic downturns.
    3. Healthcare: Businesses like Pfizer and CVS Health are generally considered defensive as demand for healthcare services often remains steady or even increases during economic slowdowns.

    However, it’s important to exercise caution when the Federal Reserve eventually cuts rates. Lower interest rates may encourage short-term bullishness, but it’s crucial to remember that this is typically a recession signal, and stock prices may bottom out 6-12 months later.

    What about tech? Likewise, while tech or high-growth stocks usually benefit from lower interest rates, it’s essential to approach them with caution, as their recent valuations suggest these benefits are already priced in.

    Strategy: Dollar-Cost Averaging

    Looking to add more stocks to your portfolio? Then consider using the dollar-cost averaging method. Instead of timing the market with one largest investment, we can spread it out to capture different market prices. 

    • “Dollar-cost averaging” involves buying smaller amounts of a particular investment on a regular schedule, regardless of its price.
    • This approach helps to manage price risk, as you’re not trying to predict market highs and lows.

    With the market’s current volatility, it’s best to be proactive, patient, and persistent.

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