13 November 2024
general
There has been a lot of news from the US over the past few weeks, but one thing that might have escaped your notice is the change to interest rates.
Just like the Bank of England, the Federal Reserve (Fed) has been holding interest rates steady for more than a year, after increasing them between 2022 and 2023 in a bid to bring inflation back to its target levels.
But in September 2024, this changed. The Fed implemented a 50-basis-point cut to the main interest rate, which was followed by a further 25-basis-point cut in early November.
Though the cuts had been widely expected, you may still be wondering how they could affect markets and your investment portfolio if you hold stocks and shares in the US.
So, read on for a summary of the changes the Fed has made as well as the initial reaction from markets and what it could mean for you.
The Fed started cutting interest rates in September as inflation fell
On 18 September, Morningstar reported that the Fed had made its first interest rate cut in more than four years. The 50-basis-point cut took the benchmark interest rate to a target range of between 4.75% and 5%. Fed chair Jerome Powell said the measure was taken to protect the employment rate, as well as in response to inflation falling much closer to the Fed’s target rate of 2%.
On 7 November, CNBC reported that the Fed had made a second interest rate cut, this time reducing the rate by 25 basis points to a target range of 4.50 – 4.75%. The committee stated that conditions in the labour market had eased but that this remained as much of a priority for them as inflation when assessing rate changes. It also noted that economic growth had been strong in recent months.
So, though it’s not clear exactly what could happen next to interest rates in the US, the past couple of months have seen a somewhat aggressive start to the rate-cutting cycle.
So far, stock markets have reacted positively to the interest rate cuts
According to the Morningstar report, markets had already priced in an interest rate cut ahead of September. This is because markets tend to be forward-looking, and the economic indicators that led to the cut were already visible beforehand. The anticipation of the rate cut meant that small-cap stocks had their best-performing month for two decades in July, and the 10-year Treasury yield, which was 4.4% in July, had fallen to 3.7% by September.
CNBC reports that after the Fed’s November meeting concluded, stocks once again performed well, and the Nasdaq and S&P 500 both closed at record highs that day.
But across the month, equities in the US and around the world underperformed. According to data from J P Morgan, the S&P 500 fell by 0.9%, while elsewhere in the world the UK FTSE All-Share fell by 1.6% and the MSCI Europe ex-UK fell by 3.2%.
This may be because markets are affected by myriad factors, not just the rate cuts. For example, the impending US election and associated uncertainty are likely to have weighed on markets. Moreover, despite the cuts, interest rates in the US remain higher than they have been for around 17 years. Higher interest rates make borrowing more expensive for businesses, who may hold back on growth plans as a result, potentially leading to lower returns for their investors.
All these different influences make it almost impossible to predict with certainty how markets might perform from one day to the next.
It’s important to digest news like the Fed’s interest rate cuts and associated stock market developments in the context of your own goals and circumstances. It’s usually unwise to make changes to your investments based on fears or worry about short-term market moves although, over the longer term, lower interest rates will be a positive tailwind for investment markets.
Short-term volatility is part and parcel of investing in the stock market. A well-balanced portfolio that’s aligned with your risk profile and goals will be designed to withstand any fluctuations in value.
Moreover, as the J P Morgan report shows, the S&P 500 was up 21% in the year to 31 October 2024, despite its disappointing monthly returns in October. This demonstrates how taking a step back from the headlines and focusing on the bigger picture can be helpful when managing your investments.
If you’re concerned about how any potential volatility could affect your finances, it’s sensible to speak to your adviser to understand the full story. We can advise you on the most sensible steps to take to protect your wealth and continue working towards your goals.
Get in touch
If you’re concerned about how fiscal events like the interest rate cuts in the US might affect your portfolio, we can help. Email enquiries@jesellars.co.uk or call 01934 875 919 to learn more.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
