Fed, Despite 0.5%P Rate Cut,
Concerns Over Employment-Driven Recession Persist
"Big Cut, Virtually Minimal
High Rates Hinder US Economy"
Post-Rate Cut Investment in Gold & Long-Term Bonds
Utilities and Financial Stocks Over Tech Stocks
David Rosenberg [Image source=Rosenberg Research]
As the United States enters a full-fledged interest rate cut cycle, there are expectations that global funds will flow into risk assets. However, concerns about a recession triggered by U.S. employment remain, prompting warnings against premature aggressive investments. Instead, safe assets such as gold or long-term U.S. Treasury bonds are seen as promising investment options during the rate cut period, and in the stock market, utility and financial stocks are expected to yield better returns than technology stocks.
David Rosenberg (photo), founder of Rosenberg Research and a renowned economist, downplayed the Federal Reserve's (Fed) big cut (a 0.50 percentage point cut in the benchmark interest rate) in an interview with MarketWatch on the 19th (local time), saying it was merely an acknowledgment that the Fed had maintained a tightening policy for too long.
He also viewed that despite the Fed's significant rate cut, concerns about a labor market-driven recession persist. The Fed's dot plot projects the interest rate at 4.40% by the end of this year, which is still high compared to the 0-1% rate levels before the COVID-19 inflation period. Rosenberg questioned, “How can (Fed Chair Jerome Powell) say the U.S. economy is strong when he says the downside risk to the labor market is greater than the upside risk to inflation?”
Rosenberg pointed out that considering the Fed raised rates by more than 500 basis points (1bp = 0.01 percentage points) from 2022 to 2023, this big cut is actually minimal, and high interest rates still stand in the way of the U.S. economy. He emphasized, “The recession has been delayed, not derailed.”
Nevertheless, the day after the Fed’s big cut, the three major New York stock indexes surged significantly. This was due to the peak of risk-taking sentiment following the rate cut. The Dow Jones Industrial Average, focused on blue-chip stocks, rose 1.26% to 42,025.19, and the S&P 500, centered on large-cap stocks, closed at 5,713.64, up 1.70%. Both indexes hit record highs that day. The tech-heavy Nasdaq Composite also jumped 2.51%.
However, Rosenberg warned that if a recession becomes visible, the stock market could suffer even during the rate cut period. He also noted that stock prices have already priced in the rate cuts.
Rosenberg recommended investing in long-term U.S. Treasury bonds. He predicted that the yield on the 10-year U.S. Treasury bond will fall below 2.5%, emphasizing that “there could be tremendous returns next year.” When bond yields fall, the attractiveness of previously issued bonds with higher rates increases, causing bond prices to rise.
He also viewed gold investment as attractive. Gold prices have a strong inverse relationship with interest rates. During a rate cut cycle, bank deposit attractiveness decreases and the dollar weakens, leading to increased demand for gold.
For stock market investments, Rosenberg advised focusing on utilities, communication services, real estate, financials, and growth stocks with high dividend tendencies. He said, “Technology stocks are still not a good investment timing because their price-to-earnings ratios (PER) and multiples remain high.”
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