Despite the expected uptick in core inflation for August 2025, the jobs situation is such that the US Federal Reserve Open Market Committee is likely to be steadily cutting interest rates. The lower rates that the Trump administration has been hoping for will hopefully reduce borrowing cost and help reduce how much the US pays on its debts. But what about you, Mr. and Mrs. investor? How should you invest when interest rates are lower?
Investments When Interest Rates Are Low
Fidelity recently published and article about investments to consider when interest rates fall. In anticipation of steadily lower rates one could buy bonds and other securities at a fixed rate and then see the relative yield go up when rates fall. But once rates are lower treasuries and bonds become less attractive compared to stocks. The Fidelity article covers bonds, etc. at some length but says nothing about stocks and other investments.
Stock Investments When Interest Rates Fall
Investments that tend to benefit from lower interest rates include industrials, tech stocks, utilities, financials and insurance companies, home builder, real estate, and consumer discretionary stocks. Utilities are often seen as an alternative to bonds as they pay dividends that are similar to interest yields on bonds and still have the potential for long term appreciation, which bonds and treasuries do not have. As we saw in the aftermath of the Financial Crisis as well as the aftermath of the Pandemic, big tech tends to rally when interest rate costs are low. Part of this is because the cost of doing business is lower in a low interest rate environment and part is because when rates are dismally low, almost any stock will look attractive because of its potential for both long and short term appreciation.
Choice of Investment Independent of Current Interest Rates
Stock traders can profit from buying and selling around the time of Fed Rate announcements as the market is so closely tuned to expectations of rate changes. However, over the longer term a company needs to have a strong product line, good R&D, and sound fiscal management in order to grow and reward investors. Thus, your choices of stock investments should not be made blindly based on interest rate cuts. The better approach is somewhat like that of intrinsic value investors. Choose a solid stock with all of the right qualities and invest using dollar cost averaging. This way you will buy fewer shares when prices are high and more when they are low. And, like with intrinsic value investing you will have picked a stock with strong, long term growth potential!
How Low Are Interest Rates Likely to Go?
At the current time we are only looking a rate cut of a quarter percent. Predictions are that mortgage rates could fall to the 4% range. This is noting like the aftermath of the Financial Crisis when rates fell to near zero in the US and into negative territory elsewhere. All of this assumes that Trumps’s tariffs do not cause a broader trade war and global economic meltdown. If that were to be the case, or if Trump succeeds in taking over the day to day operations of the Fed, then rates similar to the post-Financial Crisis era would be possible. If that happens CDs, bonds, and treasures would prove negligible returns and the investing world would double down stocks, likely causing a significant rally. One should not be hoping for a global crisis but being aware of this possibility could help one position themselves in the stock market beforehand. An economic collapse would drive the market down only to see it jump higher with near zero interest rates.