The Federal Reserve Open Market Committee (FOMC) meeting was among the most eagerly anticipated events for investors in September. At the meeting, the Fed announced its decision to maintain the current interest rates. However, it also hinted at a potential rate hike before the year’s end. Let us delve deeper into the details of the FOMC meeting and its potential implications.
Why did the market drop even when the Fed paused?
Markets had knee-jerk reactions after the Fed’s announcement. The primary reason is that the Fed’s forward guidance was more “hawkish” than expected. Prior to the meeting, the consensus among analysts was a forecasted 100 bps cut in the Fed’s policy rates for 2024. Though the Federal Reserve still envisions a decline in policy rates in the future, the pace could be slower than initially expected. The September meeting’s dot plot signalled an inclination towards a more conservative 50 bps reduction. Markets reacted negatively to reprice the newly set expectations.
It is not entirely negative though
Reading between the lines of the FOMC statement, it is not entirely negative. In fact, the Fed revised its economic outlook upward. The September FOMC meeting came with fresh economic projections: the Fed raised its GDP forecast for 2023 to 2.1% from an earlier 1% and improved its 2024 outlook to 1.5% from the 1.1% projected in June. Concurrently, expectations for the unemployment rate were also adjusted favourably throughout the forecast period. Chair Powell said soft landing was not his base case, but he does think it is possible, and the Fed will move carefully to try to achieve it.
Syfe’s take on the interest rates outlook?
In our opinion, the November rate hike could be possible, but is not set in stone yet. As Chair Powell hinted during the September FOMC press conference, saying, “We’re fairly close, we think, to where we need to get,” it is very likely that the hiking cycle is nearing its conclusion.
In the longer-term outlook for 2024 and 2025, interest rates are still anticipated to trend downwards. The dot plot, which displays the projections of Fed officials on interest rates, indicates a decrease in the policy rate from 5.6% in 2023 to 5.1% in 2024, with a further reduction to 3.9% by the close of 2025. Most analysts now expect the first Fed rate cut to start in the second half of 2024.
What do “higher for longer” rates mean for your investments?
- Equities: Earnings growth is the long-term driver. The anticipation of “longer-for-higher” rates may lead to short-term volatility in the equity markets, as investors adjust to the new rate expectations. Nevertheless, it is crucial to note that the primary long-term catalyst for equities remains earnings growth. A potential soft landing could stabilise equity performance in the longer run. Disruptive technology stocks are still an interesting long-term investment opportunity, fueled by a recovery in the memory segment and swift AI adoption.
- Bonds: Offer attractive starting yield levels. A “higher-for-longer” interest rate scenario may not necessarily be negative for bond investors, especially for those seeking yields. Given attractive yields across fixed income sectors, investors can prioritise high-quality bonds instead of venturing further down the credit spectrum for favourable returns. Our Income+ portfolios are designed to navigate different interest rate environments.
- S-REITs: Negative news may have been priced into valuations. Singapore REITs have been facing headwinds since 2021 due to rising financing costs. The “higher for longer” scenario suggests that S-REITs might begin to experience reduced financing costs in the second half of 2024. Currently, S-REITs are trading at attractive valuations. Their price-to-book ratio is at 0.9x, below the 10-year average of 1.03x and near a 10-year low. Through our REIT+ portfolios, you can invest top 20 S-REITs in one portfolio.
Build a robust long-term investment portfolio with Syfe
Markets often dance to the unpredictable tunes of uncertainty, making it a mission impossible to predict macroeconomic events and their subsequent market reactions. However, the golden rule remains: diversification is your ally. For those with an eye on the long-term horizon, short-term market dips could be windows of opportunity. By consistently investing in a well-diversified and risk-optimised portfolio, you can navigate the turbulence and potentially reap the benefits over time.