Best ways to play falling interest rates, elections and AI, according to investing pros – The Mercury News

James Royal, Ph.D. | Bankrate.com (TNS)

Investors have a lot of concerns right now – the potential for falling interest rates, the U.S. elections and the emergence of artificial intelligence. How should they play these events?

Bankrate’s Market Mavens survey asked the experts about some of the most important questions for investors in 2024:

— Once the Fed begins cutting rates, how might investors and savers respond when yields or returns on savings are moving lower?

— With the U.S. election ahead, how should investors approach the uncertainty and the variety of potential outcomes?

— What is your view of the market’s enthusiasm around tech stocks and AI, and how should investors with long-term time horizons approach it?

How the pros respond to falling interest rates

The Federal Reserve has made it clear that it’s poised to move interest rates lower as soon as it sees inflation more consistently moving toward its 2 percent target. With inflation having moved lower, most market watchers think it’s only a matter of time until the Fed cuts rates.

So Bankrate asked survey participants: “Once the Fed begins cutting rates, depending on the timing and trajectory, what are some opportunities and/or risks, unintended (or intended) impacts that investors should consider? Related to that, how might investors and savers think or behave in an environment where yields or returns on savings are moving lower?”

“A lot depends not only when the Fed is cutting rates, but why,” says Patrick J. O’Hare, chief market analyst, Briefing.com. “If it is because inflation has moved toward the 2.0% target, but growth is still decent, then there is a lot of opportunity in value stocks and small-cap stocks.”

Top picks here might include the best performing small-cap ETFs.

“If rates are coming down because growth is faltering, or we are in a recession, it won’t be good for stocks in general but probably less bad for the quality growth stocks,” he says. “In this instance, there would be opportunity in Treasuries and cash would be held dear as investors look simply to preserve capital.”

So investors may turn to top money market funds in that case.

“When the Fed starts cutting rates, equities tend to do well, particularly small cap stocks, as they have more floating rate debt than large cap companies,” says Dec Mullarkey, managing director, SLC Management. “As the cost of debt drops, earnings improve as long as economic growth holds up.”

But the pace of Fed rate cuts is also important to the market’s performance, say analysts.

“One concern that investors could have is that even though the Fed begins to cut rates, do they do it too slowly,” says Brad McMillan, chief investment officer, Commonwealth Financial Network. “There have been signs of deceleration in some of the economic data. Investor sentiment could become overly negative if they begin to think the Fed should be more aggressive.”

How should investors respond to U.S. election uncertainty?

A hard-fought presidential election is one of the biggest uncertainties facing Americans this year, but big Congressional shifts could also play out, too. So Bankrate asked: “With the U.S. election ahead, how should investors think about uncertainty (if at all) as well as the variety of potential outcomes, including who wins the White House and how control of Congress is determined?”

Many respondents mentioned key uncertainties surrounding government spending but also noted that stocks tended to go up over time regardless of the political administration in office.

“Volatility tends to increase when the U.S. gears up for a presidential election,” says Mullarkey. “Since markets are very familiar with both presidential candidates, there are fewer unknowns. And the market in general performed well under both.”