The Federal Reserve’s is set to lower interest rates in two weeks.
Most investors are looking at this as one of the biggest events of the year. Lower interest rates often provide a tailwind for stocks, and it sure feels like this market could use a boost right now.
But if that’s the only thing you’re thinking about you’re missing a bigger opportunity.
Sure, lower rates are going to act as a short-term catalyst for stocks prices to move higher. It’s one of the Fed’s unintended consequences.
But historically, the Fed “Bump” from lowering interest rates is short-lived.
The S&P 500 runs into a headwind after three interest rate cuts, except for a few select sectors whose businesses are directly tied to benefitting from lower rates.
And that’s where the opportunity lies.
This small corner of the market is going to see an increase in their industry as interest rates move lower. More business at better margins for bigger profits. That’s not something that NVIDIA is going to be able to do just because rates are going down.
I’ve got a short list of three exchange traded funds that are in that exact situation. Higher rates slowed their growth and now lower rates are set to slingshot their performance higher over the next two years.
Real estate stocks have gone through a tough couple of years.
Higher interest rates put a lot of commercial real estate activity on the edge of disaster.
Just over a year ago, analysts were pointing at the fact that billions of dollars of commercial real estate debt were getting ready to mature, requiring refinancing. That wall of debt could have caused much more ruin in the real estate market, but lower rates are set to help extinguish much of the risk.
One caveat, the commercial real estate market is dealing with lower occupancy rates, which is driving the prices of some real estate down. But the risk of an all-out blowup in the industry has lowered dramatically.
The iShares Dow Jones Real Estate ETF (IYR) provides a portal to investing in the rebound that is likely to continue as we move into a lower rate environment.
The IYR invests mainly in Real Estate Investment Trusts that are involved in everything from commercial to retail to healthcare real estate.
The diversity of the investments of the Real Estate ETF helps to lower the risk that I already mentioned with the lower occupancies in the commercial markets.
Institutional investors started migrating money into the iShares Dow Jones Real Estate ETF earlier in April and May as speculation that the Fed would lower rates was growing stronger. As a result, we saw the shares post a long-term price bottom just above $80.
That bottom along with the steady flow of capital into the IYR shares has resulted in the real estate ETF shifting into a long-term bull market for the first time since 2020.
The iShares Dow Jones Real Estate ETF is now in the process of moving above $100. Breaking above this psychologically significant price level along with lower rates will add fuel to the real estate ETF’s trend higher.
Another industry that has suffered through the last few years of high interest rates is the regional banks.
Unlike the large “investment” banks, regional banks make the lion’s share of their business and profits from commercial and mortgage lending.
Companies like Fifth Third Bank (FITB), Huntington Bank (HBAN), and Citizens Financial Group (CFG) were hit hard as businesses and potential homebuyers stopped looking to take new loans because of higher rates.
Of course, this sector also suffered dramatically by the collapse of Silicon Valley Bank in 2023.
With the confidence crisis for the regional banks over and rates heading lower, the SPDR S&P Regional Banking ETF (KRE) is set to flourish in a lower interest rate environment.
Shares of the KRE started to see the same institutional money flow in May, shifting the sector out of its long-term bear market trend.
In July, the ETF’s 50-day moving average shifted into a bullish trend as well. This indicates that the ETF now has market momentum behind it’s bullish move and that the “trend is it’s friend” now.
Investors should expect earnings for the regional banks to start to improve in early 2025, but now is the time to get is ahead of the rush higher.
They say that “cash is an investment” when the market gets volatile, but for the last few years holding cash has paid off.
Higher interest rates forced the banks to start paying more interest on deposits. Banks like American Express and some of the regionals that I mentioned above started paying depositors more than 5% to hold your cash in their “vault”.
Income investors loved it, but hose higher deposit rates are already diving as banks prepare for the Fed to lower rates.
This means that all that money in the banks is going to start looking for other income alternatives.
This is the type of market that makes the iShares Select Dividend ETF (DVY) attractive.
The DVY shares are constructed of just over 100 dividend yielding stocks. The top 10 holdings from the dividend yielding ETF are in the table below.
With a yield above 3%, the Dividend ETF is an attractive alternative to the low yields that will soon be available in cash or other interest bearing investments, but there’s a kicker.
The dividend yielder stocks are seeing more demand from buyers as the market prepares for those lower rates. As a result, 72% of the companies in the Dividend ETF are trading in bull market trends. Compare that to less than 45% of the Nasdaq 100 stocks and you get the sense that this group of companies is set to outperform the broader market.
DVY shares are trading in short- and long-term bull market trends, with a year-to-date performance of 16%. That, plus the dividend yield puts you close to 20% while the large cap technology Nasdaq 100 is only returning a total of 14% for 2024.
