Where to Invest in Declining Interest Rate Environment?

A short and sweet list of asset classes, sectors and industries that benefit

The chart above comes from the St. Louis Fed. Note that the shaded gray bars are recessions. They have almost exclusively come when the Fed funds rate was declining. If the history is any guide, we may be in line for another one in not so distant future.

We have the first 50 basis points in the bag. This is the first rate cut among many yet to come. The Fed has an aggressive timeline for the rate cuts. Currently the rates are at 4.75%-5.00% after the recent cut. We expect the rates to go down to 2.00%-2.25% by the end of 2026. This is a rapid pace.

What does a Rate Cut Mean for the Economy?

A rate cut means the cost of borrowing is now lower. On the consumer side, car loans, credit card rates and mortgage rates will all decline. The housing market in particular has been on the freeze in the recent years due to high mortgage rates. This will change. Look for the following sectors to do very well:

• REITs

• Home Improvement

• Home Builder Stocks

• Appliances

• Automotive

The hospitality and dining industries will improve as well as people feel richer and have easier access to credit.

From a business perspective, access to cheaper credit will disproportionately help business that rely on debt more. This includes industries with high capital expenditures such as construction, home building, Steel, etc.

Industries that do not carry lot of debt, for example, Tech will not see much benefit from lower interest rates. Perhaps some of their customers may be able to bring forward some of the enterprise projects, but Tech is not necessarily going to be as magnificent as it has been in recent years. Will semiconductors continue to ride the AI wave? Perhaps, until the cycle runs out. But this is less correlated to the interest rates.

Consider Lowering Your Bond Allocation

As interest rates go down, the bond yields will also go down. This means that the bond prices will rise. This is good news if you are holding bonds now, but at some point, the high price and low yield situation calls for looking for better investment options. Equities is where all the action is.

Yield will be in high demand. Expect solid dividend payers to appreciate nicely. If you have a portfolio of solid dividend stocks, hold on to them.

But What about the Recession?

Take a look at the shaded gray areas in the chart that denote recessions. See how small the gray areas are compared to the unshaded areas! Recessions tend to be brief. If you have enough liquid cash on hand to ride out any emergencies without having to dip into your investments, you will be good no matter what.

Or you can do what some of the best investors do. Use any recession to your advantage by scooping up cheap assets and wait for them to recover.

Happy Investing!