CIO of Equities breaks down likely scenarios for US Fed meeting this week, how that fits into her outlook, and where investors can find advantages
The US Federal Reserve appears all but guaranteed to announce its first interest rate cut of the post-pandemic era on Wednesday. While there has been some debate as to whether that cut will be 25 or 50 basis points, there is broad consensus that a cut will come. Fed policy has been a key tone setter for equity and fixed income markets since rate hikes began in 2022. Lesley Marks expects that dynamic to continue.
The CIO, Equities at Mackenzie Investments explained that within her broad outlook for equity markets there are two looming sources of likely volatility: the US election and the expectation for the pace of Fed policy rate cuts. Ahead of Wednesday’s announcement, Marks expects that the Fed will cut by only 25 basis points. That lines up with the view that the US economy is still headed for a soft landing. Looking ahead, she believes the pace of those changes will be a key indicator for investors.
“The real question is going to be around the pace of Fed rate cuts,” Marks says. “If the pace starts to increase beyond 25 basis points per meeting, I think that's where investors will get, maybe a little bit more concerned that the soft landing scenario is turning into a greater economic slowdown or potential recession. That’s where Fed policy plays a big role in the expectations for asset classes, because it really can impact the psychology of the investor if things start changing very quickly.”
A 25 basis point cut, Marks explained, should receive a relatively muted greeting on the markets. It aligns, however, with her broader outlook for a relatively strong US economy that should continue to support equities. The onset of cuts, too, should open up greater opportunities for fixed income investors. Despite the volatility she expects to come from Fed policy and the US election, Marks is relatively confident in the balanced portfolio through to the end of the year.
While Marks expects a pretty standard reaction to the cut on Wednesday, she notes that the commentary we get from Fed Chair Jerome Powell will be crucial to the impact we see. The most recent remarks we’ve heard from Powell were at the Jackson Hole Economic Symposium in late August. Those comments seemed to lay the table for cuts and showed investors that the Fed’s focus has shifted from CPI to employment data. However, while there has been some uptick in US unemployment Marks notes that we haven’t seen a big acceleration in layoffs. There may be more balance in the remarks than some analysts initially expected.
Those relatively strong jobs numbers, Marks explained, are why she believes the Fed won’t cut by 50 basis points on Wednesday. She notes, as well, that other Fed governors have not expressed the level of concern about the economy needed to justify such a significant interest rate cut.
Given the role Fed policy has played in equity markets, there has been an element of a ‘bad news is good news’ dynamic experienced by investors since 2022. When we see signs of weakening in the US economy, many investors greet that as supportive of a cut and equity markets respond to the upside. Marks now says the dynamic has become more nuanced. After a few false starts to the cutting cycle, it now seems more likely. However, Marks expects volatility to increase as investors balance their outlooks between a hard and soft landing because, “every hard landing begins with a soft landing but not every soft landing leads to a hard landing.”
If the economy decelerates more significantly that could be a sign that a hard landing is incoming. From an equities standpoint, Marks expects that would cause greater volatility.
Within equity markets, Marks still expects the AI trend to hold significant weight for investors. Some of the recent volatility we have seen in AI-related stocks, Marks says, is largely the result of a shift in investor expectations over the short-term. She continues to believe AI is a secular trend that is not going away. Beyond AI and technology, the onset of a US cutting cycle should be supportive for more interest-rate sensitive sectors like real estate, utilities, and even telecommunications.
Given how much noise has been generated in the past two years about the US Fed and the eventual onset of cuts, Marks can see how some investors might be primed to react strongly to the first cut if it does come this week. Her message, however, is to keep calm and carry on.
“A lot of information will come surrounding the Fed’s first rate cut, but I would treat it as just that,” Marks says. “It’s important to stay educated around what it means when the Federal Reserve starts cutting and the narrative they provide accompanying their cuts. As far as portfolio positioning, I think that this event should have very little impact on the position of a long-term oriented portfolio.”
