By Randy Locklier, President and Chief Investment Officer, Gulf Financial
Led by Big Tech the equity markets are at or near all-time highs. The S&P 500 Index returned +2.3% in August. Nine of the eleven S&P 500 sectors traded higher, led by Consumer Staples, Real Estate, Health Care, and Utilities. The story is the same across all major indices. Is it about time to take some gains and shift strategy? We think so and here’s why:
Corporate investment-grade bonds produced a +1.9% total return in September as Treasury yields declined, slightly outperforming corporate high-yield’s +1.5% total return. Treasury yields fell for the second consecutive month, driven by expectations for deeper rate cuts in response to rising unemployment. There is a surge in the fixed income market, and we want to ride that wave.
Bonds traded higher for a fourth consecutive month as Treasury yields declined and investors rushed to lock in current fixed income yields ahead of the first interest rate cut. The Fed is set to cut interest rates as focus shifts to the labor market. Investors expect the Federal Reserve to start cutting interest rates at its next meeting.
Fed Chair Jerome Powell signaled the move at last month’s Jackson Hole conference by saying, “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.” It was the Fed’s clearest policy signal since it last raised interest rates 14 months ago. The Fed’s transition to cutting interest rates comes as its focus shifts from lowering inflation to supporting the labor market. Since the last rate hike in July 2023, inflation has dropped from 3.3% to 2.9%, while unemployment has risen from 3.5% to 4.3%. The Fed is more confident that inflation will return to its 2% target but is concerned about the overall health of the U.S. labor market. The key question is how much and how quickly the Fed will lower interest rates. Investors anticipate that the Fed will cut rates by approximately -2% through the end of 2025, but the timing and amount will depend on the economy’s path. A weaker economy would justify more rate cuts, while a stronger economy would likely lead to fewer rate cuts.
As investors we can view the current market landscape and see that there is a great opportunity to capitalize on the rate cuts and seek gains in the bond market. By moving into corporate, municipal, and treasury bonds early in the rate cut cycle, we can expect gains to our bond portfolio. A very basic financial principle is as interest rates fall, bond prices rise. At Gulf Financial we have increased our positions in individual high grade corporate bonds in anticipation of this event. Individual bonds have less interest rate and redemption risk than bonds in an ETF or Mutual Fund. We created a carefully researched portfolio of individual corporate and tax-free municipal bonds just for this purpose.
Do you want to learn more? Call Rhonda at (833) 403-4041 or visit gulffinancialgroup.com today.
