Weekly Buzz: ✂️ Cut to the chase: What falling interest rates mean for your portfolio

The US Federal Reserve (Fed) is poised to kick off its interest rate cutting cycle next week, with traders now viewing a cut on 18 September as a near certainty. The only question left is by how much: 0.25 or 0.5 percentage points?

Either way, it's a huge deal: falling interest rates will affect the economy, and your portfolio, in a number of ways. Here's what you need to know.

When will interest rate cuts come?

Last week’s job market report was the last major insight before the Fed’s decision. The US created 142,000 new jobs, higher than July’s 89,000, but lower than the predicted 161,000. Unemployment figures softened the blow, easing from July’s 4.3% to 4.2%.

It’s a mixed bag of results, but it seems the market is now pretty much set on a 0.25% rate cut on 18 September. Based on prices in the futures market (our Simply Finance breaks this down), traders expect two 0.25 percentage point cuts and one 0.5 percentage point cut by year-end (the current target US interest rate is 5.25–5.5%).

What does this mean for my portfolio?

Stocks: Rate cuts are generally a boon for stocks – lower borrowing costs spur business and consumer spending, while less attractive yields prompt investors to shift away from cash equivalents to riskier assets like equities. But their impact can vary depending on the broader economic context. In a soft-landing scenario, where inflation is brought down without triggering a recession, the S&P 500 has risen by 15% on average in the year following an initial rate cut.

Bonds: As we covered in our recent CIO Insights, interest rates have experienced a “reset” – now at their highest levels in nearly 25 years. Income seekers are in a much better position compared to the zero-interest-rate environment just a few years ago.

And when interest rates fall, existing bond prices rise, because they still pay out at the previous, higher rates. This is why "locking in" high yields now can be advantageous – you're securing a favourable rate and positioning yourself to benefit from capital appreciation. For an easy way to invest in global bonds, check out our Passive Income portfolio template.

What’s the takeaway here?

While it’s important to understand how markets can shift in the nearer-term, the key is sticking to a strategy that lasts. Our analysis of 21 Fed easing cycles shows that returns across all major asset classes have historically been flat immediately following a rate cut. But given time, they bounce back, with bonds leading the recovery and equities following.

Having a diversified portfolio that’s tailored to your risk appetite acts as a net, capturing opportunities across various asset classes and market conditions (it’s what our General Investing portfolios are designed for). By staying invested with it, you position yourself to make the most of every market cycle – rate cuts included.

This article was written in collaboration with Finimize.

🎓 Simply Finance: Futures market

When analysts say "the market is expecting" a certain event, they're not just talking about general sentiment. Often, they're referring to data – for example, prices in the futures market.

Futures are contracts to buy or sell something at a specific price on a future date. Traders and institutions, armed with research and analysis, buy and sell them based on what they believe will happen. As more bets are placed on a particular outcome (like an interest rate cut), the prices of those contracts shift, reflecting what the market collectively expects.

💼 Data in Brief: 9-13 September

• Monday: China inflation
• Wednesday: UK GDP, US inflation
• Friday: US consumer sentiment

The latest US inflation data showed a slight uptick in core CPI, as disinflation in goods prices was offset by a pickup in stickier services costs. This suggests the Fed may opt to kick off its rate cut cycle next week with a more cautious 25 basis point cut, rather than an outsized 50 bps reduction.

But even more important than the size of the initial cut, is that the Fed starts to cut. From an economic perspective, this would start alleviating pressure on households and businesses from a prolonged period of high borrowing costs. For investors, history shows that the onset of rate cut cycles tends to have a positive impact across various asset classes over the long term, as illustrated in our chart above.

- The StashAway Investment Team