Countdown to interest rate cuts! Capture long-term assets and make your wallet bulge!

Recently, the US stock market has entered the election season. Since the first debate, the US stock market has officially entered the election trading period. The different views of the Republican and Democratic parties will have different impacts on different industries. With occasional withdrawal dramas, the election is full of excitement. Here, we will not focus on the election, but on the interest rate cut cycle.

Anyway, the market will switch to interest rate cutting assets in the third quarter.

The interest rate cut cycle is approaching, it’s time to focus on long-term assets. What are long-term assets?

Long term assets refer to assets that generate cash flows or returns over a longer period of time. Their value and return are usually influenced by future interest rate changes and market conditions. The characteristics of these assets typically include longer investment terms, lower liquidity, and higher interest rate and time risks for investors. Common types of long-term assets include:

1. Long term bonds: such as government bonds and corporate bonds, typically have a longer maturity period, up to 10 years or even longer.
2. Real estate: commercial and residential real estate, especially real estate investments that have been held for a long time to generate rental income and capital appreciation, such as real estate REITs.
3. Infrastructure investment: including roads, bridges, power facilities, etc., which usually take many years to build and start generating returns.
4. Private equity investment: Investing in equity of non listed companies, which usually takes a long time to exit and obtain returns.
5. Equity in technology and biotechnology companies: These companies may take a long time to achieve technological breakthroughs and gain market recognition, resulting in returns. A typical example is many companies in the cloud computing SaaS industry, whose valuation relies on discounting expected cash flows for many years in the future due to their unique business model. They are extremely sensitive to the discount rate, which is also the interest rate, making them a typical representative of long-term assets. There are also biotechnology companies that rely on their potential successful R&D pipelines in the future and are also sensitive to interest rates.

Investors in long-term assets typically require a longer investment horizon and the ability to withstand risks, as these assets may experience significant price fluctuations in the short term but have the potential to generate higher returns in the long term. Especially in low interest rate environments, long-term assets are favored due to their potential high returns.

Long term assets, when interest rates rise, their value may be negatively affected. During the 2022-2023 interest rate hike cycle, long-term assets have suffered a brutal valuation kill, with the core being the valuation decline caused by the rise in discounted interest rates, as well as the slowdown in performance due to high inflation, ultimately leading to the tragedy of Davis’ double kill, typical companies such as Zoom, Peloton, and Roku.

A turning point is slowly emerging, with the core being the sustained weak economic data in the United States recently, which has officially begun the cycle of interest rate cuts.

With weak economic data, the market has doubts about the sustainability of the Federal Reserve’s “higher for longer” policy, and expects the first interest rate cut in September, with a 50 basis point cut within the year. Last week’s PCE data was also lower than expected, with a core PCE of 0.2% month on month and an overall 2.6%. The speed of inflation decline was confirmed against the backdrop of weak consumption.

The slowdown in economic growth and signs of weakness in consumption and labor markets suggest that the Federal Reserve may have to adjust its high interest rate policy in the near future to avoid further damage to the economy. As core inflation indicators may continue to decline, the likelihood of the Federal Reserve cutting interest rates twice this year is increasing.According to the latest CME interest rate cut expectations, there will be a first rate cut in September and a second rate cut in December. The annual rate cut will be 50 basis points, and the market will officially enter the rate cut cycle trading in the third quarter.

According to the latest CME rate cut expectations, the Federal Reserve will conduct its first rate cut in September 2024 and its second rate cut in December, with a full year rate cut of 50 basis points. This means that after entering the third quarter, the market will officially begin the interest rate cut cycle trading. In this context, focusing on long-term assets has become an important investment strategy:

What profound impact does the interest rate cut cycle have on the market? Next, we will expand on asset categories:

Bond market:

• Long term bond benefits: Interest rate cuts typically lead to a decrease in bond yields and an increase in bond prices, especially for long-term bonds. Investors tend to purchase long-term bonds during interest rate cut cycles to lock in higher yields. Therefore, long-term treasury bond and highly rated corporate bonds may become beneficiaries, and focus on TLT/TMF

• Interest rate sensitivity: Long term bonds are more sensitive to changes in interest rates, and the expectation of interest rate cuts will lead to an increase in the prices of these bonds, resulting in capital gains.

stock market:

• Growth stocks: Interest rate cuts usually benefit high growth stocks, especially those that rely on financing to expand their business, such as technology stocks. The lower interest rates have lowered the financing costs of these companies and increased their valuations.

• Dividend stocks: High dividend stocks may also benefit from interest rate cuts, as lower bond yields make investors more inclined to seek high dividend stocks with stable cash flow.

Real estate market:

• Rising housing prices: Cutting interest rates will lower mortgage rates, thereby increasing demand in the real estate market and pushing up housing prices. Real estate investment trusts (REITs) may perform well.

• Reduced financing costs: Lower financing costs help real estate developers and homebuyers, further driving the development of the real estate market.

Commodity market:

• Precious metals: Interest rate cuts typically lead to a weakening of the US dollar, which in turn drives up prices of commodities denominated in US dollars, such as gold and silver. Investors can consider increasing their allocation of these precious metals to hedge against inflation risks and currency depreciation.

Investment Strategy Suggestions

• Increase in long-term bonds: In the cycle of interest rate reduction, long-term bonds (such as treasury bond with a maturity of more than 10 years and highly rated corporate bonds) will benefit from the price rise brought about by the decline in interest rates.
• Pay attention to high growth stocks and high dividend stocks: Technology stocks and high dividend stocks usually perform well during interest rate cut cycles. Investors can increase their holdings of high-quality stocks in these sectors.
• Investing in real estate and REITs: As interest rate cuts will lower mortgage rates, the real estate market may perform strongly, and investors can benefit from investing in real estate and real estate investment trusts.
• Configuring precious metals: Increase the allocation of gold and silver to hedge against potential inflation risks and currency depreciation.

risk management

Although interest rate cuts usually have a positive impact on the market, investors still need to be aware of the following risks:

1. Economic uncertainty: If interest rate cuts fail to effectively boost the economy, the market may experience volatility, and investors need to remain vigilant.
2. Inflation pressure: Cutting interest rates may exacerbate inflation pressure, especially in a tight supply chain situation. Investors need to closely monitor inflation data and adjust their investment portfolios in a timely manner.
3. Policy changes: The Federal Reserve’s policy changes may exceed market expectations, and investors need to pay attention to policy meetings and related statements to adjust their strategies in a timely manner.

In the third quarter’s interest rate cut cycle trading, long-term assets will be the main beneficiaries due to their sensitivity to changes in interest rates. Investors should pay attention to long-term bonds, high growth stocks, high dividend stocks, real estate, and precious metals, while closely monitoring economic and policy developments to flexibly respond to market changes.

For ETFs, the following ETFs can be considered:

In the interest rate cut cycle, industries that usually benefit include technology, real estate, consumer goods, utilities, and finance. Here are 10-20 ETF recommendations that may perform well in the interest rate cut cycle, along with an analysis of the reasons:

technology industry

1. Invesco QQQ Trust (QQQ)
   • Tracking the Nasdaq 100 index, which includes numerous tech giants. Interest rate cuts typically lower borrowing costs and promote investment and innovation in technology companies.
2. Technology Select Sector SPDR Fund (XLK)
   • Including major technology companies such as Apple, Microsoft, etc. The technology industry benefits from lower capital costs and increased consumer demand.

real estate

1. Vanguard Real Estate ETF (VNQ)
   • Invest in Real Estate Investment Trusts (REITs) in the United States. The interest rate cut has reduced borrowing costs and increased activity and yields in the real estate market.
2. Schwab U.S. REIT ETF (SCHH)
   • Tracking the Dow Jones US Select Real Estate Index also benefits from the low interest rate environment.

consumer goods

1. Consumer Discretionary Select Sector SPDR Fund (XLY)
   • Including consumer goods companies such as Amazon and Tesla. The interest rate cut has increased consumers’ purchasing power and driven consumption growth.
2. Vanguard Consumer Discretionary ETF (VCR)
   • Investing in American consumer goods companies benefits from increased consumer spending.

public utility

1. Utilities Select Sector SPDR Fund (XLU)
   • Including major utility companies. The interest rate cut has reduced the financing costs of public utility companies and increased stable dividend returns.
2. Vanguard Utilities ETF (VPU)
   • Invest in American utility companies and enjoy the financing cost advantage brought by lower interest rates.

finance

1. Financial Select Sector SPDR Fund (XLF)
   • Including banks, insurance companies, etc. Although the banking industry may face net interest margin pressure in the early stages of interest rate cuts, overall demand for financial services is on the rise.
2. iShares U.S. Financial Services ETF (IYG)
   • Tracking US financial service companies, benefiting from the long-term increase in economic activity and consumer borrowing demand.

Communications Services

1. Communication Services Select Sector SPDR Fund (XLC)
   • Including communication service companies such as Facebook and Google, benefiting from increased advertising spending and consumer demand.
2. Vanguard Communication Services ETF (VOX)
   • Invest in American communication service companies and enjoy the growth in consumer spending brought about by interest rate cuts.

healthcare

1. Health Care Select Sector SPDR Fund (XLV)
   • Including healthcare companies such as Johnson&Johnson and Pfizer. The interest rate cut has increased consumer spending and increased demand for medical services and products.
2. iShares U.S. Healthcare ETF (IYH)
   • Tracking US healthcare companies, benefiting from lower capital costs and increased consumer spending.

industry

1. Industrial Select Sector SPDR Fund (XLI)
   • Including industrial companies such as Boeing and 3M. The interest rate cut has reduced financing costs and promoted investment in infrastructure and manufacturing.
2. Vanguard Industrials ETF (VIS)
   • Invest in American industrial companies and enjoy the opportunities brought by economic growth and increased investment.

material

1. Materials Select Sector SPDR Fund (XLB)
   • Including material companies such as DuPont and Dow. The interest rate cut has promoted the construction and manufacturing industries, increasing demand for basic materials.
2. iShares U.S. Basic Materials ETF (IYM)
   • Tracking American basic materials companies, benefiting from increased economic activity.

Other recommendations

1. SPDR S&P 500 ETF Trust (SPY)
   • Widely invest in S&P 500 index companies and enjoy the growth brought by the overall economic recovery.
2. Vanguard Total Stock Market ETF (VTI)
   • Invest in the entire US stock market and enjoy the broad market returns brought by interest rate cuts.

The interest rate cut cycle usually reduces borrowing costs, promotes consumption and investment, and benefits industries such as technology, real estate, consumer goods, utilities, and finance. These industries typically perform well due to reduced financing costs and increased demand. The recommended ETFs mentioned above cover these beneficiary industries and provide diversified investment options. The entire text is complete.