An Investment Strategy Guide After Jackson Hole Economic Symposium | Moomoo Research

The Jackson Hole Economic Symposium, also known as the Global Central Banking Conference, is an annual economic symposium hosted by the Federal Reserve Bank of Kansas City. This event began in 1978 and is usually held between late August and early September each year in Jackson Hole, Wyoming, USA (this year marks the 47th edition). The symposium garners significant attention due to the high level and influence of its participants, which include central bank governors, financial officials, renowned economists, and representatives from financial media from around the world.

Because central bank governors and key economic policymakers from various countries may reveal crucial information about the future direction of monetary policy at this event, the Jackson Hole Symposium serves as an important window for the market to predict future policy trends.

In this grand event, Powell's speech focused on two key points:

1. The Timing for Rate Cuts is Ripe: Chairman Powell announced that the time for rate cuts has arrived, which sent a signal to the financial markets. He pointed out that inflation is steadily declining toward the 2% target, marking a transition towards a more stable economic environment. His remarks conveyed confidence in inflation expectations, indicating that we do not need to sacrifice a strong labor market to achieve a reduction in inflation.

2. Prudent Pace of Rate Cuts: Although the curtain for rate cuts has risen, Powell did not disclose the specific extent of the rate cuts, nor did he provide a clear roadmap for future rate-cut cycles. His speech was filled with caution regarding future economic and policy prospects, emphasizing that the Federal Reserve will adjust its policies based on incoming data and the evolving economic outlook. This "data-dependent" stance indicates that the Federal Reserve will maintain flexibility and adaptability on the path of rate cuts.

The most critical point is the expectation that the U.S. economy is likely to achieve a so-called "soft landing." The discussions during the symposium suggested a more dovish stance on rate cuts, increasing the probability of preemptive rate cuts.

What impact will preemptive rate cuts have on investments, and what are some good investment targets in this context?

If rate cuts are a long-term trend, they will be beneficial for bond prices. According to duration calculations, theoretically, each 1% rate cut could lead to a roughly 15% increase in the price of TLT. Therefore, we could continue to hold bond ETFs such as TLT and generate premium income by selling high-priced call options.

Refer to previous articles to learn how to combine options with ETFs for steady gains.

The current valuation level of the S&P 500 is at the upper edge of historical ranges, making it seem not cheap in a longitudinal comparison. However, the average PE ratio for the M7 companies this year is around 37 times. Excluding these companies, the S&P 500 valuation may not be that expensive.

Meanwhile, in the context of an economic soft landing, preemptive rate cuts could increase the valuation of the S&P 500 index and support positive fundamental developments. Interest rates act as the gravitational force for asset prices; a lower interest rate environment could elevate stock valuations. If preemptive rate cuts successfully avoid a recession and support economic growth, companies within the S&P 500 index could benefit from higher demand and better earnings prospects.

When considering index-based investment strategies, especially for large-cap stocks in the U.S. market, ETFs tracking the S&P 500 Index are a popular choice for many investors. The following discusses the investment opportunities and options for ETFs.

In a soft landing scenario, where the Federal Reserve may adopt preemptive rate cuts, these rate cuts are usually moderate. In such a case, REITs could benefit from lower financing costs and relatively stable real estate demand.

From a yield perspective, REITs are required to distribute at least 90% of their earnings to investors, providing relatively stable dividend yields. This yield is particularly attractive in a low-interest-rate environment. Additionally, REITs invest in various types of real estate assets, such as residential, commercial, industrial, and healthcare facilities, which help diversify risk.

With so many REITs to choose from, how do we select the best ones? Given the need to deeply analyze each REIT's financial status, dividend policy, asset diversity, capital structure, and financing costs, investing in REIT ETFs simplifies this process.

VNQ is known for providing stable dividend returns. As of August 26, 2024, VNQ offers a dividend yield of 3.76%, with an asset size of $66.33 billion. Its main holdings include Prologis, Public Storage, Simon Property Group, and several other REIT-related trust companies. Additionally, VNQ has a management fee rate of about 0.11%, which is lower compared to its peers.

As of August 23, 2024, SCHH offers a dividend yield of 2.95%, with an asset size of $72.88 billion. Its main holdings include Prologis, Welltower, and several other REIT-related trust companies. Additionally, SCHH has a management fee rate of about 0.07%, providing a good cost advantage in the industry.

As of August 23, 2024, XLRE offers a dividend yield of 3.14%, with an asset size of $75.41 billion. Its main holdings include Prologis, Simon Property Group, and several other REIT-related trust companies. Additionally, XLRE has a management fee rate of about 0.03%.

However, it is important to note that if the soft landing does not materialize and the economy shows signs of a hard landing, investments in the S&P 500 and REITs will face significant risks, except for bonds. In such a scenario, the stock market could suffer due to concerns about economic growth prospects, and REITs could be affected by reduced commercial activity and a downturn in the real estate market.

In an uncertain economic environment, caution, flexibility, and diversification of your investment portfolio are key to successful investing.