The Time Has Come…

In a previous life, when I used to go on television to talk sports, I covered racing a lot. In the south, NASCAR is the king of motorsport. I always enjoy the end of a race—the final laps–when the intensity gets dialed up a notch or two. As one commentator used to say, “it’s time to get up on the wheel.” Hold on tight and get focused. It’s go time.

I sometimes use that line with my wife when we’re on a long road trip and I need to get reenergized from the monotony of the drive. I’m not saying it makes me drive like Earnhardt, but try it. It works at getting you reinvigorated.

As the race is winding down, fuel levels are getting stretched and tire tread is wearing out. Drivers and their teams must make an important decision: stay out on the track and risk your car doesn’t have enough juice to make it to the finish. Or make a pit stop, improve your car, but risk falling behind for good.

As the race is winding down, fuel levels are getting stretched and tire tread is wearing out.

It becomes a social dance where drivers watch what other cars are doing before making their move. Each driver goes as far as they can not to commit to a decision. But, there is a line—a commitment line—that once crossed, forces your hand. You must exit the track and visit pit road.

Yes, commitment can be hard. It backs you into a corner. Nobody wants that. So, you wait as long as possible. You try to gather as much information as you can before making your decision.

That’s where the Federal Reserve was until Friday in Jackson Hole, Wyoming. There, Fed Chair Jay Powell made his commitment clear.

That’s where the Federal Reserve was until Friday in Jackson Hole, Wyoming.

“The time has come for policy to adjust.”

That might not sound clear to you. But, to the markets, it was a glass of filtered drinking water. It was confirmation rate cuts will begin next month.

Okay, so with cuts now on the doorstep, how should you position your money?

Okay, so with cuts now on the doorstep, how should you position your money?

Remember, strategy is personal. If I sat down with each of you—all 519 subscribers of this newsletter—we’d likely land on 519 different strategies. With that caveat, let’s explore.

What if you’re looking to invest in a goal a decade or more into the future? Lower rates can help make so-called “risk assets” like stocks more attractive. Basically you’re looking at the difference between what you can get paid to hold cash in savings versus the expected return of stocks. The wider that gap is, the more attractive stocks become.

Lower rates should widen that gap. They will likely lower the return of your cash sitting in savings accounts, CDs or money market funds. The tricky scenario happens when lower rates are caused by a weakening economy. That will likely mean weaker performance from stocks. That was the fear a month ago when the market suffered a setback. But, that fear seems to have abated.

They will likely lower the return of your cash sitting in savings accounts, CDs or money market funds.

What if you have a goal five years out? Lower rates should help the bonds you hold in your portfolio. There’s two ways you make money with bonds. The interest you collect and the change in price.

If rates are falling, the price the market will pay for your bonds will likely go up. So, you’ll get to collect interest and may also get some price appreciation that will enhance your performance.

Of course, bonds move for various reasons and not all bonds move in the same direction. So, it’s important you understand what types of bonds you own to further understand the potential risks and rewards.

Of course, bonds move for various reasons and not all bonds move in the same direction.

What if you’re looking to save money for a goal in the next couple years? This is where the stability of cash is so vital. If the Fed lowers rates, it will mean lower rates of return on your cash. That’s not fun. But, even still, short term goals require a greater focus on stability. That’s why in these cases, cash is king.

Finally, what if you want to buy a home? The Fed lowering rates should help homebuyers at least on the mortgage rate. In fact, you’re already seeing that in anticipation of the Fed’s move. Rates have fallen about 1.5% from their peaks last fall. That’s the good news.

The bad news for buyers, prices have continued pushing higher. It’s impossible to forecast where home prices will go from here, but one key when buying is making sure you can afford the home on Day 1. That means keeping your monthly housing costs to within a third of your monthly income.

The bad news for buyers, prices have continued pushing higher.

Yes, rate cuts can be beneficial for investors and borrowers…if the economy holds up. For now, that seems to be the case. We’ll be watching…

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.