"Fed Cuts Interest Rates: What It Means for Financial Markets and How Small Investors Should Respond"

US central bank (The Fed) cut interest rates after four years, marking a major change in its monetary policy. The move comes after a long period of gradual rate hikes aimed at taming inflation and cooling the overheated US economy.

But the rate cut raises new questions: what effect will this move have on financial markets? And what should small investors do to adequately respond to this change? Editorial office SZ Byznys so she contacted several experts to find out what this change means for markets and retail investors.

History shows that rate cuts often boost stock markets, as cheaper financing spurs corporate growth and boosts consumer spending. But what will be the real impact on current markets and which sectors will benefit the most from this change?

according to Timura Barotovamarket analyst at BH Securities, markets are generally “forward looking,” meaning that most of the effects of rate cuts are already baked into asset prices.

“Markets expected this move by the Fed. Lower central bank rates, or the expectation of lower rates, means that US government bonds are yielding less and less,” explained Barotov. Lower bond yields make these funds less attractive, forcing investors to shift capital to stocks.

According to Barotov, companies that rely on debt financing benefit the most from this environment, especially smaller companies and startups, or companies that sell products or services on credit. This includes, for example, car manufacturers, developers and manufacturers of specialized industrial equipment.

On the other hand, some sectors could lose their appeal in an environment with lower rates. “The most expensive titles, known as the big seven, could go back to the background, because now investors have more choice and when the markets believe that there will be no recession, it would make sense to capitalize to move from expensive stocks to cheaper ones. “, explained Barotov.

In addition, he mentions that lower rates are usually reflected less in the performance of the financial sector (banks, insurance companies), public infrastructure (eg energy) and essential consumer goods. (supermarkets, major food producers, etc.).

Marek Ševčíkportfolio manager J&T Investiční száměstí, believes that the rate cut provides an opportunity especially for capital-intensive sectors such as the real estate market.

“In particular, we like real estate stocks, although not necessarily American ones. We expect the European Central Bank to follow the Fed and we now see properties in Western Europe at an attractive price with one of the highest potentials,” explained Ševčík.

At the same time, the portfolio manager draws attention to the risk associated with the technology sector. “In general, it can be said that in an environment with low interest rates, all assets do well, but in the medium and long term, valuations, or the acquisition price, are essential . For this reason, I am concerned about the potential of the technology sector,” he said.

History shows that the markets’ response to Fed rate cuts is not always clear, but it often has a positive effect on stock performance three, six, and twelve months after the initial cut. The chart below shows the performance of the S&P 500 after each interest rate cut since 1974.

The data shows that the average performance of the S&P 500 index is 5.5 percent three months after the rate cut, while it is 10.6 percent after six months and 11.3 percent after twelve months. However, in some cases, especially during recessions (eg, 2001 and 2007), stock markets fell after rate cuts.

The data shows that although interest rate cuts have historically supported growth in markets, developments can be influenced by other factors such as macroeconomic conditions or global uncertainty. According to experts, such investors should evaluate the situation carefully and not make short-term decisions based only on depreciation rates.

Investment Strategy Conseq Investment Management Michal Stupavskystressing that investors should remain calm and stick to their long-term strategy.

“Based on historical statistics, the beginning of the cycle of lowering of base interest rates by the US Fed does not have a clear impact on the financial markets. On the one hand, the lower level of base interest rates is indeed positive and stimulating for the economy, but on the other hand, the beginning of a rate reduction cycle usually comes at a time when economic dynamics already tend to ‘slow down,” explains Stupavský.

According to him, the rate cut could lead to a weakening of the US dollar. “Lower interest rates should send the US dollar slightly weaker,” Stupavský said, adding that a weaker dollar could support emerging market bonds and boost gold and silver prices. .

When asked how small investors should approach their portfolios, Timur Barotov replies: “In response to the Fed’s rate cut last week, it is not possible to give much of an answer , this is mostly reflected in asset prices.” However, the prospect of further declines is manageable.”

According to Marko Ševčík, small investors should not pay attention to the individual measures of central banks in the daily management of their portfolios. “In my opinion, small investors, whether they prefer passive or active management, should not be too worried about individual measures of central banks,” says Ševčík.

He recommends sticking to the proven ratio of 60 percent stocks and 40 percent bonds, with younger investors able to hold a higher proportion of stocks.

Michal Stupavský agrees and says that the key is a long-term plan and proper distribution of assets. “Ideally, retail investors should not react at all to changes in the Fed’s monetary policy stance in their portfolios. On the contrary, they should consistently stick to their long-term investment strategy, whatever it is,” Stupavský summarizes.