The Fed: Five Takeaways, Five Moves (and) Five Stocks

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Sep 19, 2024

Investors are focusing on Wednesday’s move by the U.S. Federal Reserve to cut the benchmark Fed Funds rate by half a percentage point.

But Wealth Builders like you and me are looking forward — far forward. We’ll avoid getting tangled up in the minutiae. We’re looking past even that.

We’ll show you what to do. And we’ll show you how to do it.

But let’s start with the five takeaways folks need to know:

Takeaway No. 1: It’s a Hefty Cut: On its surface, it seems to signify the Fed feels good about its progress vis a vis inflation … but the Fed is perhaps a bit worried that keeping rates “higher for longer” may have caused it to overshoot the “soft landing.”
Takeaway No. 2: It’s Not Clear What Comes Next: Analysts are assuming we’ll see another cut before the end of the year and more in early 2025. And that seems to be what the Fed is telling us. But don’t forget, as 2023 wound to a close, all the “experts” were certain the Fed would cut rates six times. The reality: This week’s reduction — which took rates from their earlier range of 5.25% to 5.5% to one of 4.75% to 5% — was the first since March 2020. This Fed is very data-focused. And that data will help determine what comes next. There is good news, however: Going back to 1929, the S&P 500 has risen 86% of the time in the 12 months that followed that first rate reduction, says broker Charles Schwab Corp. SCHW 0.00%↑.
Takeaway No. 3: It’s a High-Wire Act: Thanks to my long tenure as a student, reporter, analyst, columnist and stock picker, I’ve seen more Fed heads operate than most of my peers. I hold inflation-crusher Paul Volcker in high esteem. Great Financial Crisis maestro Ben Bernanke gets a gold star, too. And current Fed Chair Jerome Powell, the 16th to hold that post (and the guy who’s operated the stick-and-rudder since 2018), also gets my vote as one of the best. Powell navigated the first worldwide pandemic in the “Modern Global Economy.” He also did so as government debt soared to terrifying levels. And his greatest challenges may be yet to come. If the “higher for longer” mantra morphs into “too high for too long” recriminations — and ignites a recession — then “faster and deeper” may be the catchphrase we will remember.
Takeaway No. 4: We Need to Keep Some Powder Dry: As we’ve seen during past financial crises — including the Great Pandemic, The Big Short Era and even the Asian Contagion — big rate cuts can be a great “lever” to pull. But also remember that there are limits to how low Team Powell will (or can) go. So even during a rate-cut campaign, it’s shrewd to keep some dry powder and not to have already overextended yourself if we see “in case of trouble, break glass” moments unfold.
Takeaway No. 5: There’s All That Debt: A hundred years ago (1923), public debt stood at $403 billion. It was $33.17 trillion last year and $35.26 trillion in August of this year – about double what it was 15 years ago. Think of it like you’re carrying a big balance on a personal credit card with a variable rate: If rates go higher, your payments rise in kind; if they fall, your payments do, too. The Congressional Budget Office (CBO) recently projected that interest payments on public debt will account for 34% of federal revenue by 2054 – meaning interest payments would dwarf even Social Security payouts. Longer-term (and understand that I’m oversimplifying this), there could be pressure to keep rates lower – no matter what inflation does.

THOSE FIVE (PROMISED) MOVES

I share this for a reason – not to engage in minutiae, but to show you why it’s smart to avoid it: Making bets on near-term catalysts – especially during periods of great uncertainty — is a move for Wealth Killers. It’s best to focus on the long term. That’s what winning investors do.

That said, there are moves you can make in the wake of this Fed move — because they will position you for the long haul.

I have five moves … and five stocks that’ll help you.

Move No. 1: Grab Yield: If you haven’t already (as I’ve been advocating) move now to lock in strong-yielding income investments — ahead of the next round(s) of rate reductions and ahead of the $12.5 trillion “Reinvestment Tsunami” whose first wave will hit in October. One income play to consider: AGNC Investment Corp. AGNC 0.00%↑, whose recent yield was 13.6%. (And watch for an upcoming report that’ll bring you even more high-yield income plays.)
Move No. 2: Reevaluate Holdings: Despite Wednesday’s rate cut — and the promise of more — we’re also into a part of the year that’s historically volatile. And there are a host of storylines playing out globally that could feed into that uncertainty at any moment. Take a look at what you’re holding — and ask tough questions. Are there any big losers? Are you holding stocks or other investments where the “story” has changed, no longer makes sense, or no longer fits your goals? Consider trimming them to pare risk and raise cash for new opportunities.
Move No. 3: Reevaluate Expenses: Here at Stock Picker’s Corner (SPC), we focus on stocks, investment income, alternative assets and special-situation opportunities. But I’ll mention this here anyway. While the Fed rate cut doesn’t directly impact mortgage rates (which are tied more to the 10-year U.S. Treasury yield), lending costs for homes have been falling — from a pinnacle of around 8% last fall to about 6.3% now, says Bankrate.com Chief Financial Analyst Greg McBride. Additional Fed reductions should be accompanied by more of a slide in mortgage rates — though not on a one-to-one basis. If you’ve got a high-rate mortgage, as rates continue to fall, see if it’s worth refinancing. The same holds true for credit cards: As the central bank raised borrowing costs, credit card rates hit their highest levels in decades. With rates now falling, shopping around could make sense. And new home-equity lines of credit (HELOCs) could fall, since they’re tied to the prime rate — what banks charge their best customers for borrowing money.
Move No. 4: Tune Out “The Noise:” We live in an era of information overload — and “pack journalism” — where “events” trigger headlines that every media outlet races to replicate. Trust me: I worked in U.S. newsrooms for nearly a quarter century. So I know how this works. I know that, when a story breaks, the first thing an editor does is to tell his/her reporters to “go find ‘our’ angle on this story.” The result: A “noise barrage” about that day’s events, repeated over and over and over. In fact, it’s even worse now than it was during my reporting days, because of all the influencers with their platforms who feel compelled to give you their “take” on that story (even if they have no idea what they’re talking about … or are trying to push a specific agenda). During some of these blitzes, having a dump-truck load of busted cinder blocks dropped on you would be easier to ignore than the headline barrage about rate changes, sell-offs (or massive surges) in a stock or the broad market, bad news about a company, or some geopolitical “black swan” event that comes out of nowhere. As investors – heck … as human beings – we feel the urge to “do something … anything” to give us the illusion of control at that moment. Well … don’t. In the words of Confucius: “He who succumbs to knee-jerk reactions frequently only knees himself … in the groin.” Okay … okay … Confucius didn’t actually say that (maybe he should have?). But it sounded good. And it’s true.
Move No. 5: Be a “Wealth Builder” – And Stay Focused on the “Long Game:” For retail investors, there is just no superior alternative – heck, no alternative at all – when it comes to investing that leads to building wealth. Time is your competitive advantage. It helps you avoid the moves that most investors just can’t seem to avoid. Most investors just … can’t … resist … reacting to “news.” And I get it … it’s human nature. They want the feeling of control. They feel compelled to make a move – any move – to feel like they’re doing … something to get that feeling of control. But that’s all it is – a feeling. It’s not reality. Short-term trading of options or other derivatives is even worse. (I have a story I’ll share very soon about a trading disaster that I just discovered). Find the best storylines and then find the best stocks. Get income from investments that throw off actual cash flow. Zero in on “special situations” that nobody else sees. And, with most of these, look to hold them for three, five, seven years … or more.

Here’s a list to get you started …

THOSE FIVE STOCKS

In this post-Fed environment, I put together this list to consider:

Another Income Play: In addition to the afore-mentioned AGNC, check out Angel Oak Financial Strategies Income Term Trust FINS 0.00%↑ , a Big Board-listed, closed-end fund that invests primarily in mortgage-backed securities. It aims to keep at least 50% of its holdings invested in investment-grade debt. And it also buys financial-sector stocks — both common and preferred. FINS currently trades at about $13.10 — putting it up near the top of its 52-week range of $11.66 to $13.24. Its current payout of $1.31 a share — doled out as monthly 11-cent dividends – equates to a yield of 10.57%.
A Special-Situation Play: Industrial heavyweight DuPont de Nemours Inc. DD 0.00%↑ is planning a corporate breakup that’ll be tax-free to shareholders and create standalone plays in advanced materials, semiconductors and water treatment. Truth be told, I really like this deal: It’s a rare three-for-one breakup, creates companies in sectors with strong underlying storylines and will let each of these units go after business with fervor and focus. The company announced the breakup in May and aims to execute it by late next year or early 2026. At a recent price of $83, this is a stock – and an opportunity – that intrigues me a lot. And we just presented SPC Premium with our “Super 10”— a portfolio of 10 “special-situation stocks” to check out for further opportunities.
An AI Play: We are at the very beginning of the Artificial Intelligence (AI) Era. That means there’s plenty of roadway, plenty of profit and (ultimately) plenty of wealth to come. One of my favorites: Broadcom Inc. AVGO 0.00%↑, a chipmaker that I’ve followed for years (I recommended it — and its predecessors — to subscribers at my Private Briefing newsletter more than a decade ago). And it’s a company I’ve been talking about here. We never follow Wall Street’s lead, but we’re only too happy to have Wall Street follow ours. Just this week, in fact, William Blair analyst Sebastien Naji put an “Outperform” rating on Broadcom. And he said the $12 billion in AI chip revenue it’s projecting this year is just the start for “continued steady growth.” At $164 a share, Broadcom has rebounded a bit from its earlier sell-off but remains down from its highs. Current target prices range from $192 to $240. And earnings are projected to grow at an average annual pace of more than 21% over the next five years.
A Money Play: Lower rates translate to lower financing costs. That’s why lower interest rates can be a key ingredient for surging dealmaking. Lately, I’ve been talking a lot about the growing influence private-equity (PE) players are having on the American economy. One of the biggest dealmakers: Blackstone Inc. BX 0.00%↑, another company that I’ve followed for years. (For instance, at Private Briefing, I watched as it snapped up distressed houses during the Great Financial Crisis — and made at least $7 billion when it sold them off when real estate rebounded.) With more than $1 trillion (that’s “trillion” … with a “T”) in assets under management, Blackstone is the world's No. 1 manager of alternative assets. It’s executing on a massive data center strategy. And it’s looking to invest in NFL teams. In short, Blackstone knows how to make money. And while it does, you will, too. Shares currently trade for about $155 each; earnings are projected to grow 30% next year and grow at an average of 24% over each of the next five years.