US Federal Reserve Likely to Cut Interest Rates by December

There are rising expectations that the US Federal Reserve may lower interest rates in December. Major banks and market players are increasingly leaning towards this possibility. For instance, JPMorgan recently adjusted its prediction, suggesting policymakers might actually implement a 25 basis point cut in December, rather than waiting until January.

The shift in outlook comes after recent weak employment and inflation data, alongside comments from influential Fed officials indicating a readiness to act sooner rather than later. To illustrate this sentiment, the CME FedWatch tool shows traders believe there’s an 85% likelihood of a quarter-point rate cut in December.

While inflation appears to be easing somewhat, the labor market has cooled, as evidenced by disappointing employment figures and hiring freezes at companies. This situation is adding pressure on policymakers to stimulate growth. Therefore, many see interest rate cuts approaching as a necessary measure to avoid a significant economic downturn and to support job growth. This could lead to notable market fluctuations, making certain exchange-traded funds (ETFs) especially appealing.

Before diving into specific ETFs that might be a good fit for your portfolio post-rate cut, let’s quickly touch on which sectors stand to gain from a decline in interest rates.

Generally, lower interest rates reduce borrowing costs across the economy, which tends to enhance growth and make stocks more appealing compared to fixed income options.

• Technology stocks: Companies within the tech sector, often characterized by high growth potential, heavily rely on future earnings. A drop in interest rates increases the present value of those future profits, leading to a rise in current valuations.
• Small-cap stocks: Smaller companies, sensitive to domestic economic conditions, often depend more on borrowing for expansion than larger corporations. They usually benefit from lenient monetary policies, as reduced interest rates cut down on debt servicing costs and enhance access to affordable finance.
• Financial sector: Banks with diverse operations may see a boost in lending activity as interest rates drop.
• Consumer goods and utilities: Reduced interest rates enhance access to credit, thus increasing consumer spending power and profit margins for businesses in the consumer discretionary sector. The utilities sector also benefits due to its capital-intensive nature, as financing costs decline with lower rates.

As consensus builds around a December rate decrease, many investors might want to keep an eye on ETFs focused on Financials, Consumer Discretionary, Utilities, and Technology. If the economic climate warrants, investing in these sectors could prove advantageous, particularly small-cap ETFs.

Technology Select Sector SPDR ETF (XLK)

This fund manages assets worth $91.47 billion and spans 70 companies across various industries, including technology hardware, software, and semiconductors. Major holdings include giants like Nvidia (14.24%), Apple (13.49%), and Microsoft (11.64%). Since the start of the year, XLK has seen a remarkable 22.6% increase and charges a fee of 8 basis points.

iShares Russell 2000 ETF (IWM)

IWM holds assets valued at $71.69 billion, focused on 1,958 US small-cap stocks. Top holdings are Credo Technology (0.84%) and Bloom Energy (0.75%). It has risen 12.8% this year, with a management fee of 19 basis points.

Financial Select Sector SPDR ETF (XLF)

XLF has $51.45 billion in assets under management, including a focus on 75 companies within financial services, such as insurance and banking. Major holdings feature Berkshire Hathaway (12.39%) and JPMorgan Chase (11.07%). Year-to-date, it has increased by 10.7% and also charges 8 basis points in fees.

Consumer Discretionary Sector SPDR ETF (XLY)

With $23 billion in assets, XLY covers 49 companies within sectors like retail and leisure. It includes top companies such as Amazon (22.88%) and Tesla (20.02%). This fund is up 5.4% year-to-date, with an 8 basis point fee.

Utilities Select Sector SPDR ETF (XLU)

XLU manages $22.07 billion and focuses on 31 companies involved in power supply and utilities. Noteworthy holdings include NextEra Energy (12.75%) and Constellation Energy (8.12%). XLK has climbed 21.4% this year, maintaining a low fee of 8 basis points.