New versus old ‘staples’
As noted above, consumer staples have a record of outperformance in the one to three years following an initial rate cut. We find the sector to be well priced after lagging in the 2023-2024 market rally, with attractive return prospects over a one-year horizon. Yet its future may not be as robust as in prior cycles. The catalysts for significant staples growth, such as the 1980s’ rising crop of dual-income families embracing the convenience of packaged foods, are mostly played out.
Meanwhile, the technology sector, a relative underperformer in prior cutting regimes, demonstrates more “staples-like” characteristics in 2024 and beyond as the world is increasingly digitized. Tech also has a powerful catalyst in the artificial intelligence (AI) boom that is in very early innings with the potential to transform businesses across the global economy for many years to come.
Real estate-related beneficiaries
Real estate becomes more interesting with a rate-cutting cycle underway. Homebuilders, for one, benefit from the drop in 30-year mortgage rates, which should boost new home sales ― even as earnings for these companies have already been strong amid a dearth of existing homes for sale. As mortgages become more affordable and housing turnover increases, companies such as title insurers and mortgage writers could be beneficiaries as well.
For consumers, a matter of discretion
We are seeing signs of stress, particularly among the lower-income consumer, and more prudence being applied to discretionary purchases across income cohorts. But falling rates have us incrementally more bullish, particularly as the cycle advances. Lower rates allow consumers to finance big-ticket items they may have been delaying, such as autos. As consumers are applying extra discretion, so are we. Stock selection is especially important in the current environment, as not all consumer companies will benefit equally.
On watch for a dividend revival
As the Fed cuts rates, the days of 5% yields on cash are numbered. The retired and near-retired populations in the U.S. are growing, setting the stage for an increasing need for income-producing assets. This makes dividend-paying equities a more compelling consideration after years of 5% risk-free rates. With the average dividend yield on the major large-cap indexes still sub-2%, actively managed dividend strategies that can offer yields rivaling bonds and cash become a more attractive consideration.
Bottom line
Rate cuts historically have been positive for stocks, and we see no reason to expect this time would be different. However, the opportunities on offer are subject to change in any given cycle based on underlying market, sector and industry dynamics ― and companies’ individual ability to navigate them.
We believe this is where active management can be additive, particularly in periods of transition and in the broader context of what we see as a new era for equity investing in which alpha, or above-market returns, may be a more critical portfolio input.
