Top Chief Investment Officer Shares Tips and Forecast Ahead of Fed Rate Cuts

As a result, Wall Street leaders no longer debate if The Fed will cut rates, anything will happen how much it costs. Some say Fed officials will opt for a smaller rate cut of 25 basis points, given that the economy remains far from recession in the view of most economists. But others, including some Fed officials, said a 50-basis-point rate cut was the best option to prevent further weakening of the labor market after years of high borrowing costs.

Steven Wieting, a prominent financial expert who wears many hats at Citi Wealth, who serves as chief economist, chief investment strategist and interim chief investment officer, sees a 25 basis point rate cut as the most likely outcome in this week, but he stressed that one cannot know for sure.

“We were looking for 25, but we’d definitely take 50 … if they want to do it faster, they could,” he said. wealthadding that “they might decide that ‘hey, if we can be fast on the way up, we can be fast on the way down.’

However, Wieting noted that the Fed’s “historical inclination” is to cut by 25 basis points whenever it merely realigns monetary policy to current economic conditions, as they are this week, while larger rate cuts are usually reserved for times when the economy is on the upswing. precipice of recession.

“And that’s really important here. The underlying context is that we don’t think the economy is on the brink of collapse,” he said. “But will (current) monetary policy interact and cause a bigger slowdown than necessary? We think it will be. That is why there is a need (for the Fed) to act.”

Still, while investors focused on debating the size of the Fed’s interest rate cut in September, Wieting argued that it was not the most important factor at play for markets.

“It’s really a tactical question. And it really won’t play much into the direction they ultimately go. And it certainly doesn’t tell us the state of the economy, which is what everyone wants to know,” he said.

Wieting noted that since it expects 200 basis points of rate cuts (a two percentage point drop in the Fed funds rate) by mid-2025, the Fed’s decision to cut rates by 25 or 50 basis points this meeting will not be a game changer. Significant rate cuts are coming, it’s just a matter of time, he predicted.

The prospect of ongoing rate cuts to stimulate the economy is the tone of Powell’s testimony, and the Fed’s longer-term outlook for rates will be more important than the short-term decision of 25 or 50 basis points. Fed Chairman Jerome Powell has proven his ability to move markets with a few words in the past, including after he said “the time has come” to cut rates at the Fed’s annual meeting in Jackson Hole in August, sending stocks to a record high since then. less than a week later.

“He was able to ease effectively at Jackson Hole — guide down the rate path, explain what the Federal Reserve is doing and incorporate that impact into the markets,” Wieting noted.

But while dovish comments from Powell implying more future cuts could benefit stocks in the near term, and hawkish comments could send them the other way, the economy and corporate earnings, rather than the Fed, will determine the way forward for the markets over the next year. Upcoming economic data – jobs reports, retail sales reports and the like – will be critical.

“I think underlying economic conditions will be much more important to financial markets than the Fed’s tactics at any given time,” Wieting pointed out. “The possibility that we could just slightly change the timing of these cuts … it really doesn’t matter much.”

However, Wieting argued that investors’ upside expectations of a rate cut could lead to increased short-term volatility. “And that could be a problem,” he said.

The answer to volatility is “quality” – and perhaps a little income

Most assets, including stocks and bonds, are highly sensitive to rate cut expectations, which could lead to large changes in trading volumes that can amplify price movements. For investors, Wieting recommended looking for “quality” stocks to outperform during the upcoming, potentially volatile, downsizing cycle. These are companies that have strong balance sheets with low debt levels and consistent earnings that enable them to deliver consistent returns even in difficult times.

In particular, he argued that dividend aristocrats can outperform in the future. S&P 500 companies that have increased their dividends for 25 consecutive years receive this title, which illustrates their ability to generate consistent profit and willingness to return value to shareholders.

Dividend aristocrats have underperformed the S&P 500 this year, but Wieting noted that they have a track record of outperformance that goes back decades and are a good option for investors looking to reduce pending volatility.

“The strategy for uncertainty is (to) increase quality. If a company is able to have the discipline to raise its dividend every year, in some cases for 25 consecutive years, it narrows down the companies that have weak balance sheets. In fact, it shrinks some riskier industries—capital-intensive cyclical industries like autos tend to fall. This is a strategy that has outperformed the market,” he said.

Wieting also pointed out that the healthcare sector is a winning defensive play for investors and argued that looking for additional income in the bond market could make sense. Although bond yields have fallen since their peak, there are still many attractive fixed income options for investors with a slightly lower tolerance for risk.

“The pillars of investment are growth and income. Now, earnings have been significantly boosted by the tightening cycle. Are we at the peak of bond yields? Not. But you can still safely build an income portfolio with a 5% yield,” Wieting said. “And what you do is mitigate your volatility for the risks you want to take.”

While building defensive income into a portfolio might make sense, Wieting believes there’s actually less risk in U.S. stocks than there was earlier this year, despite their rally. He noted that after big tech stocks led much of the market’s gains in 2023, nine out of 11 S&P 500 sectors posted rising gains this year. This expansion in earnings growth, which continues today, is a sign that the economy is far from recession. Wieting forecasts strong 9% year-over-year earnings per share growth for the S&P 500 in 2024.

“The economy doesn’t follow the rules”

While many investors predicted an economic downturn would wreak havoc on the markets, Wieting isn’t buying it. He argued that the U.S. economy has already seen an ongoing recession over the past few years — with some industries contracting as others expand — making forecasting challenging and leading to confusion among investors.

“There are so many people out there with boom views and bust views, but there is nothing V-shaped here. There are pieces in motion, it’s an economy that’s kind of in a recession in its manufacturing sector, in its housing sector, but we have very strong results for technology investment and that’s ongoing,” he said. “It’s a more complicated story … the economy doesn’t play by the rules.”

Wieting noted that there are risks to markets in 2025, citing the election as an example, but he believes corporate earnings should continue to rise as the economy avoids a true recession.

While some investors are getting jittery with stocks trading near record highs as the job market cools, he also stressed that it’s always worth staying invested. As the old saying goes: trying to time market entries and exits is a fool’s errand.

“If you want to participate in economic development, in rising living standards, you have to participate fairly… I think you have to have a certain tolerance for risk. You understand, you can decide how much drawdown risk you want to take in your portfolio and have some safe assets and some growth assets – some income and growth. It sounds daunting, but one of the alternatives is that you will lose most of your value to inflation, most of your wealth,” he warned.