Navigating Interest Rate Cuts: Insights for Family Investments And Costs
🚀 What’s happening: In the dynamic world of finance, very few events capture the attention of investors (and families) more than Federal Reserve interest rate cuts.
Understanding the historical patters of interest rate cuts offers valuable insights into where you can think about investing today, planning your family’s costs to prepare, and what might happen in 2024.
Investment Review:
As interest rates come down (assuming there is no recession) this typically spurs growth in an economy, and is positive for most investments.
A good additional rule of thumb is that aggressive or risky investments tend to perform better than safe investments (not always true, but true more times than not… we rank safe vs. risky investments here).
Below we will highlight stocks vs. bonds specifically as these are the most common investments (fyi: stocks on the whole would be considered riskier than bonds).
Stocks: Historically the stock market has responded positively to interest rate peaks and then cuts.
Lower interest rates stimulate economic growth, driving corporate earnings and reducing borrowing costs for businesses allowing them to grow and investors to reward companies that are growing faster with less fear that they won’t be able to pay back their loans.
Looking back since 1982, as the Fed ends rate hikes (July 23’ was the last hike this time) and then starts cutting rates, the stock market can have strong short term returns (again, assuming the economy avoids a recession).
*table below highlighting the S&P 500 and the Nasdaq is courtesy of IBD
The negative years of 2001 and 2007 on the right side in the below in the table saw recessions shortly after.
Bonds: A good rule of thumb is that interest rate movements and bond prices typically move opposite each other. When interest rates go down, bond prices go up, and visa versa.
However, the performance of total bond markets can vary based on factors such as bond duration (length of time until you get paid back), credit quality, and market conditions.
While the exact performance varies, historically the bond market has not offered as attractive returns compared to stocks in the 12 months following interest peaks and rate cuts.
Impact on Family Costs:
Costs will change for any family as interest rates come down, with a good rule of thumb being that your borrowing costs will go down.
Some ways to get ahead of this today is by looking at more variable debt options vs. fixed (variable debt will have interest payments that go down as interest rates come down) or simply waiting a bit to make large purchases you are planning on using debt for (i.e. a car, home, etc.).
Lastly, if you must lock in a fixed rate or already have fixed rate debt at high rates, when rates go down this should allow you an opportunity to refinance.
Homeownership: Lower interest rates traditionally stimulate demand and lower mortgage rates in the real estate market, making homeownership more accessible but also possibly increasing home prices (due to the increased demand).
Families may benefit from lower monthly mortgage payments and increased housing affordability if you are a homebuyer.
Moreover, it will give many families a chance to refinance or think about using a variable rate over a fixed rate (as interest rates are likely to keep coming down).
Historically, following interest rate peaks and the first interest rate cut in a new easing cycle, home values have risen by an average of 4-6% in the subsequent 12 months, depending on local market conditions (here is a good article on expectations for 2024 and 2025).
Education Expenses: Interest rate cuts can reduce the cost of borrowing for student loans and educational financing options.
Families planning for education expenses, including college tuition costs, may find relief as lower interest rates translate into lower borrowing costs.
Consequently, families may experience reduced financial burden and improved affordability in managing education-related expenses, including tuition, fees, and other educational costs.
Similar rules to the above apply, and look for ways for refinance or think more about variable rates.
Preparing for Interest Rate Cuts:
Putting the above together, here are some ways for families to prepare today for the coming interest rate cuts.
Debt Assessment and Refinancing: Families can evaluate existing debt obligations, such as mortgages, auto loans, and student loans, to explore opportunities for refinancing at lower interest rates. Refinancing existing debt at more favorable terms can lead to reduced monthly payments and overall interest expenses, offering financial flexibility and potential savings over time.
Diversification Strategies: Families can diversify their investment portfolios across asset classes across the risk spectrum (more on safe vs. risky assets here), including stocks, bonds, real estate, and alternative investments. Diversification helps mitigate risk and capture opportunities across different market environments, including periods of interest rate cuts.
Emergency Savings Planning: Building and maintaining an emergency savings fund is crucial for managing unexpected financial challenges and economic uncertainties. Families can prioritize saving for emergencies to cover essential expenses, medical costs, and unexpected job losses during periods of economic volatility.
Seek Professional Guidance: Consulting with financial advisors or investment professionals can provide families with personalized insights and recommendations tailored to their financial goals, risk tolerance, and investment horizon. Professional guidance helps families navigate complex financial decisions and optimize their investment strategies in anticipation of interest rate cuts and changing market conditions.
👪 Closer to home: By taking proactive steps to assess your financial situation, diversify investments, and seek professional guidance, any family can position themselves to navigate interest rate cuts and capitalize on opportunities for long-term financial stability and prosperity.
More resources on investing:
A Beginner's Guide To Starting In The Stock Market: Simple Steps To Begin Your Investment Journey
15 Questions To Ask A Financial Advisor Before Hiring Them
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