The Fed could cut interest rates in 2024. How Investors Can Prepare

Falling interest rates generally benefit stock markets, advisers said. Here’s why: Businesses can borrow money more cheaply and, as a result, are more likely to make large investments in their companies.

But a repeat of last year’s outstanding performance by stocks is unlikely in 2024, advisers said.

The S&P 500 U.S. stock index is up 24% in 2023 following a year-end rally. The surge was partly forward-looking, reflecting investor expectations of a rate cut in 2024.

“The stock market is the ultimate forecasting machine,” said Charlie Fitzgerald III, a certified financial planner based in Orlando, Florida.

“Anyone trying to time the market has already missed it,” added Fitzgerald, a founding member of Moisand Fitzgerald Tamayo. “Because it happened in the fourth quarter.”

Of course, that doesn’t mean all market growth is in the rearview mirror. But don’t make the mistake of buying stocks with the expectation that they will continue to rise, he said. (This tendency is called recency bias.)

That means growth stocks, such as the technology sector, are more likely to benefit from lower interest rates than value stocks, said CFP Ted Jenkin, founder of oXYGen Financial in Atlanta and a member of the CNBC Advisory Board.

Cash and cash-like investments, including high-yield savings accounts, money market funds, and certificates of deposit, have been among the biggest beneficiaries of rising interest rates. Cash rates have jumped to their highest levels in years.

However, if the Federal Reserve begins to cut borrowing costs, these rates will likely fall.

“If we can lock in CD rates at where they are, now is probably a good time,” Jenkin said. “There are still many places that give 5%.”

For example, savers are less interested in long-term CDs (e.g., five-year terms) than shorter-term, one-year CDs. Therefore, it may make more sense to choose CDs with shorter durations. It’s a term, Jenkin said.

Bonds have taken a hit from the Fed’s interest rate hike cycle.

This is because bond prices move inversely to interest rates. It’s like a seesaw. When interest rates rise, bond prices fall.

Bond mutual fund and ETF stock prices plummeted in 2022, the worst year on record for U.S. bonds.

Now, if interest rates fall, bond funds are poised to bounce back, advisers said.

An environment where interest rates are falling gradually is “an easy place to make money in the bond market without much risk,” Fitzgerald said.

People who have a strong belief that interest rates will fall may consider buying funds with longer maturities, which typically stand to benefit more from falling interest rates, Jenkin said. But they also carry more risks, he said.

Jenkin said real estate investment trusts are also poised to perform well even amid falling interest rates.

He added that if interest rates are expected to fall, “this is one of the best things I can do with my money.”

According to Zacks Equity Research, the REIT sector “depends heavily on the debt markets to conduct its business activities,” so these companies “benefit from lower borrowing costs.”

For investors who buy, it makes more sense to invest in retirement accounts, such as individual retirement accounts or 401(k) plans, so dividends aren’t taxed until later, Jenkin said.

As with these recommendations, it’s important to make investment decisions within a diverse portfolio composition, Fitzgerald said.

He added that you should have the right amount of stocks in your portfolio based on your age and time period, be disciplined, and don’t be surprised if the market falls.