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Seize the cycle: Simple investing tips for rate cuts ahead
Recently, all eyes are on the Fed and the big question: when will they cut interest rates? The cooling of the U.S. CPI and weak retail sales data in May have provided a boost for the record highs of US markets, as they help spark rate cut expectations.
So, if the Fed kicks off a rate-cutting cycle, how should investors position themselves? Which assets might benefit? Here are a few essential insights before making any moves.
1. Why will the Fed cut interest rates?
A rate cut refers to the Fed lowering the benchmark interest rate, known as the Federal Funds Rate. This rate is the cost at which banks lend to each other, and it affects various interest rates throughout the economy, including your loan rates, credit card rates, and savings rates.
In May 2024, the U.S. CPI showed a 3.3% annual increase, slightly below expectations, with core CPI at 3.4%. These figures suggest that consumption were weaker than anticipated. The lower-than-expected CPI indicates that consumers may be spending less, possibly due to higher borrowing costs or economic uncertainty.
The Fed cuts interest rates to reduce borrowing costs and stimulate economic growth. Lower borrowing costs bring the benefits for businesses and consumers to obtain loans, boosting consumption and investment.
2. What's the impact of rate cuts？
3. How to better manage your portfolio?
Facing the potential market benefits from rate cut expectations combined with the election year, investors may wonder how to select the optimal investment portfolio from numerous options?
Actually, rate cuts typically have positive impacts on various investment instruments. Here we primarily focus on ETFs. Because of ETFs' benefits, such as diversification, high transparency, strong liquidity, low cost etc., Warren Buffett has long commented on them:
"I think for most people, the best thing to do is own the S&P 500 index fund."
Equity ETFs
Equity ETFs benefit from rate cuts. Lower borrowing costs for companies lead to profit growth, enhancing the attractiveness of the stock market, particularly for ETFs in interest rate-sensitive sectors such as finance, real estate, and consumer goods.
Index ETFs: Broad market index ETFs, such as those tracking the $S&P 500 Index (.SPX.US)$ , typically benefit from rate cuts that stimulate economic growth and boost corporate earnings. Index ETFs that track the $S&P 500 Index (.SPX.US)$, such as $SPDR S&P 500 ETF (SPY.US)$, $iShares Core S&P 500 ETF (IVV.US)$, and $Vanguard S&P 500 ETF (VOO.US)$, offer investors a way to invest in a broad market index. Specific sector index ETFs, such as those in real estate and finance, also experience significant gains.
Bond ETFs: As market interest rates decline, bond ETFs, especially long-term bond ETFs, see their prices rise. Additionally, investors might turn to high-yield bond ETFs in search of higher returns, further increasing the appeal of these ETFs.
There are also a large number of ETFs available for investors in the U.S. stock market. Explore them with the following steps:
Taken $SPDR S&P 500 ETF (SPY.US)$ as an example, which is launched in 1993, it's first US-listed ETF and is recognized as one of the world's largest ETFs by assets under management with a notable daily turnover. Healthy liquidity facilitates ease of entry and exit for investors.
To learn more about ETFs, feel free to click here >>> A Beginner's Guide: How to Invest ETFs on Moomoo?
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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PAUL BIN ANTHONY : very helpful thanks again for your wonderful comments today and bigger than from the world with this tq God bless All you need Amen
AwNil : Very informative article
Talk show : Great information!