“The first cut is the deepest” so the famous Yusuf Islam song goes. The Federal Reserve’s 50 basis point (bps) rate cut earlier this week was enough to whet investor’s appetite.
Despite Fed chair Jerome Powell being quick to tell the markets not to expect such aggressive cuts going forward, it is the first in four years and the antidote investors have been calling for, leading to a plethora of opportunities for portfolios.
Stocks jumped on Thursday morning on the news, with the S&P 500 gaining 1.5% driven by a surge in tech stock darlings such as Nvidia (4.8%), Apple (3.5%) and Tesla (5.8%).
Small caps – which have been tipped for a recovery – bounced 1.8% on the news, and are up 4.6% for the week as markets anticipated the move.
Bonds also shifted significantly, with the 10-year yield spiking by seven bps on the move and comes after Treasury yields fell to their lowest levels since mid-2023 ahead of the decision.
Markets are still pricing in a further two 25bps cuts this year and an additional 100bps in 2025, taking interest rates down to 3-3.5% range by 2026, what is clear, is that the new cycle has begun.
ETFs to consider
Based on this, which ETFs should investors be considering to tactically play this new regime?
Firstly, gold has risen significantly following the Fed’s announcement, up 1.5% to $2,500 an ounce as of 19 September. How far this goes depends on your overall market sentiment, but many see significant upside in the commodity.
Jon Cunliffe, head of investment office at JM Finn believes it will be a challenging environment for risk assets and has a strong prediction for gold.
“I can imagine a world where gold goes to $3,300, including super low interest rates, a weak dollar and concerns about fiat currency,” he said.
Exchange-traded commodities (ETCs) to consider here are the $5.2bn Xtrackers IE Physical Gold ETC (XGDP), the cheapest in the market, or the $17bn Invesco Physical Gold ETC (SGLP), the largest.
Alternatively, investors could go for a responsibly sourced approach. Read our latest analysis of the HANetf and Janus Henderson Tabula ETCs in this area.
Another ETF to consider is the Amundi US Curve Steepening 2-10Y UCITS ETF (STPU).
The ETF has experienced significant outflows over the past few months over fears the Fed would not deliver expected interest rate cuts. However, STPU is showing signs of upside, following the rate cut.
As mentioned, US small caps have experienced a small performance bump ahead of the announcement and are an obvious call in a falling rate environment, but investors must decide how far big tech can go before committing to the asset class.
Guy Foster, chief strategist at RBC Brewin Dolphin, said: “The way the market is set up, what matters is the US technology capex cycle, if US tech continues to perform, then it is going to be difficult for small caps to compare favourably.”
So, there is plenty to consider as we enter a new market regime, with potential volatility remaining an important asset allocation decision.
