Navigating Rate Cuts, Growth Opportunities, and Dividend Resurgence: October 2024, Investment Newsletter
As we enter the final quarter of 2024, we are pleased to present the latest market insights and economic trends that will help shape your financial strategies.
In this edition, we focus on four key themes: the impact of the Federal Reserve’s recent interest rate cuts, the potential for a soft landing in the U.S. economy, growth opportunities over the next five years, and the resurgence of dividend-paying stocks.
This newsletter is designed to provide a clear perspective on the past quarter’s developments, helping you anticipate what lies ahead and position your portfolio accordingly.
The Fed Cuts Rates: What’s Next for Investors?
The Federal Reserve’s decision to cut interest rates by 50 basis points, bringing the rate down to 4.75%–5.00%, marks a significant moment in the Fed’s two-year fight against inflation. This move, the first-rate reduction since 2020, suggests that inflation may finally be under control. The rate decrease mirrors cuts implemented by central banks in Canada, Switzerland, Sweden, and Europe.
As mentioned in previous newsletters, economists believe the Fed will continue cutting interest rates over the coming quarters, though market forecasts are now less ambitious than last quarter. We expect the Fed to keep adjusting rates downward, but cautiously, to avoid reigniting inflation.
With unemployment stable and GDP growth showing resilience, many believe we’re looking at a potential soft landing for the economy. If this prediction materializes, it could be highly favorable for equity investors. Historically, the S&P 500 has performed well following rate cuts outside of a recession.
It is also important to note that the U.S. economy does not exist in a vacuum. In fact, it serves as the main reference point for global growth and capital allocation. Given economic stagnation in much of the world—except for India—the U.S. remains the most resilient economy globally.
As the dust settles on this initial rate cut, investors should remain optimistic about the near- and long-term outlooks for the American economy and markets. While volatility may spike, particularly with the upcoming election, opportunities will arise for those who can navigate the shifting dynamics.
U.S. Economy: Soft Landing or Something More?
The much-discussed soft landing—a scenario where the economy slows just enough to reduce inflation but avoids a recession—now appears within reach. Inflation has cooled significantly, while job creation, though slowing, remains positive. This delicate balance has kept the U.S. economy on a steady course, defying earlier predictions of an imminent recession.
Historically, soft landings have been followed by periods of accelerated economic growth. If the U.S. economy grows at a 1.5% annualized rate in the third quarter of 2024, it would satisfy the definition of a soft landing. This milestone is crucial because, based on historical data, economic growth tends to accelerate in subsequent periods. Many economists are optimistic that this pattern could repeat in 2025.
The Federal Reserve believes that the U.S. economy is tolerating elevated interest rates relatively well. The labor market remains resilient, with a recent rise in the unemployment rate coinciding with the addition of 114,000 new jobs. This suggests the increase is largely due to more people entering the workforce rather than job losses. This is the type of scenario the Fed aims for—moderating wage growth while maintaining steady job creation, aligning with their goal of a soft landing.
We remain cautious but optimistic about the 2025 economic outlook.
Five Growth Themes for the Next Five Years
The 24-hour news cycle often encourages us to focus on short-term fluctuations and react to every soundbite, crisis, and scandal. However, as our clients and loyal readers know, long-term gains are achieved through patience. Investors must remain committed over time to generate outsized returns.
The power of compound interest—and the generational wealth it can produce—really kicks in after years of disciplined investment. That’s why it’s important to stay on track and invest in long-term structural trends that yield value over time.
Looking ahead, five themes stand out as potential drivers of market growth:
1. Disruptive Technology
While Big Tech dominates headlines, a broader ecosystem of innovative companies supporting AI and cloud infrastructure is emerging. Firms powering AI advancements, along with their suppliers, present compelling investment opportunities.
Infrastructure plays such as telecom and cloud-computing data centers could also offer interesting risk-reward propositions for patient investors
2. Industrials and Energy
Key sectors like industrials and energy are benefiting from reshoring supply chains and the global energy transition. Companies like Eaton and Schneider Electric are well-positioned to capitalize on increased infrastructure investment and renewable energy initiatives. Meanwhile, oil majors and midstream energy companies are poised to profit from complex geopolitical dynamics that keep energy prices elevated.
While these companies may sometimes be seen as "boring," they have a history of sustained growth and dividend payouts, making them ideal for balanced income portfolios with potential for capital appreciation.
3. Health Care Innovation:
We’re entering a new era of health care driven by advancements in genetics and AI. An aging Western population, combined with technological progress, promises increased profitability over the next 5 to 10 years.
This sector holds immense potential for long-term growth, with breakthroughs in gene therapy, AI-assisted diagnostics, and blockchain for secure patient data. Health care innovations are shaping the future of the industry.
4. India’s Economic Boom:
India’s economy is expanding rapidly, creating fertile ground for growth in sectors like technology, manufacturing and consumer goods. Mid-cap companies in India are flourishing, making the country a market worth watching closely.
While much attention is focused on China and its complex relationship with the U.S., investors should look to India as a burgeoning market for growth opportunities.
5. Dividend Stocks: Closing the Gap?
Over the past decade, disruptive technology stocks have dominated market gains. For some, the debate between growth and value stocks seemed settled in favor of growth. However, the Fed’s aggressive interest rate increases over the last two years sent tech stocks tumbling, prompting a renewed focus on fundamentals like profitability, cash flow, and income streams.
Have dividend-paying stocks made their long-awaited comeback?
The valuation gap between dividend-paying equities and the broader market is narrowing as investors seek stable income in an uncertain environment. Utilities, for example, are seeing increased demand due to the growth of AI-driven data centers, with the S&P 500 Utilities Sector Index outperforming the broader market.
Other sectors, like aerospace and semiconductors, are also introducing or increasing dividends, providing attractive opportunities for income-seeking investors. With the Fed’s rate cuts potentially leading to lower yields on cash holdings, dividend-paying equities could offer a compelling alternative.
Concluding Thoughts
As 2024 draws to a close, both opportunities and challenges lie ahead. The Federal Reserve’s rate cuts, the potential for a soft landing, and growth across various sectors create a positive outlook for investors. However, staying vigilant in the face of potential market volatility—particularly as we approach the U.S. Presidential election—is crucial.
We are here to help you navigate these changes and ensure your portfolio remains aligned with your long-term financial goals. Thank you for trusting us with your financial future. We look forward to supporting your success in the months ahead.
Warm regards,
Your Wela Financial Advisory Team
Brent Forrest & Associates LLC. dba Wela Financial Advisory is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
