Analyzing the Fed Easing Cycle

Given the uncertainty surrounding both the Federal Reserve’s policy direction and the upcoming U.S. presidential election, it is advisable for portfolios to prioritize quality—favoring large-cap companies over small- and mid-cap firms.

The recent volatility in equity markets suggests that investors should consider reallocating into sectors such as communication services, energy, financials, industrials, and materials, while reducing exposure to consumer discretionary, consumer staples, real estate, and utilities.

In the bond market, investors should anticipate that short-term investments may decline alongside further expected interest rate cuts by the Federal Reserve before the end of 2024. The central bank recently lowered borrowing costs by 50 basis points.

The relatively high yields that have characterized quality short-term investments in recent years are expected to decrease. Conversely, transitioning to long-dated maturities to secure higher yields may expose investors to considerable market price fluctuations and potential losses if the economy accelerates and longer-term yields rise next year.