How investors should adjust portfolios with rate cuts in mind
00:00 Speaker A
Fed Chair Jerome Powell leaving the door open for a September rate cut, sparking a rally on Wall Street. So how should you adjust your portfolio looking forward? Let’s bring in Adele Zaman, Wall Street Alliance Group partner, for this week’s FA corner brought to you by Capital Group. So everybody’s been waiting for this speech, Adele, and waiting for whether we’re going to get guidance and more clarity on whether the Fed’s going to cut rates in September. What have kinds of conversations have you been having with clients? Are they concerned about this and do they want to kind of shift their portfolios around?
00:47 Adele Zaman
Yeah, definitely. So we have been having that recalibration conversation with clients for a while now. But as far as the rate cut is concerned, I think that this commentary by Powell is generally positive. I think what it’ll end up doing if they do start rate cuts in September, which I think most likely is going to happen, that’s going to stimulate the housing market and the GDP multiplier of the housing market is pretty high because when you buy a home, you buy furniture, you know, you spend money. So I think overall, this will be good for the economy, and that is what you’re seeing reflected in the market today.
01:48 Speaker A
Um, so do you think that people should be making portfolio adjustments today based on that kind of an expectation?
02:01 Adele Zaman
Well, what we have been talking to clients about for some time now is that some of the mega cap tech companies where a lot of concentration is going, that’s where potentially the biggest risk is in case the market falls. And for the market to fall, you know, it could be concerns about the Fed, it could be concerns about tariffs, it could be concerns about the budget deficit, but that is going to be the area of greatest vulnerability. So we’ve been asking clients to improve the breadth in their portfolios, add exposure to other sectors like utilities, energy, financials, gold, internationals. These relative value areas of the market will hold up better in case of a pullback.
03:14 Speaker A
Um, and these are also some of those areas are traditional value areas that sometimes do better during a rate cut cycle. Do you think this is going to be typical in that way?
03:38 Adele Zaman
I think it is going to be typical because of all the other factors going on, right? Because we heard what Sam Altman said about the AI bubble, right? So I think a lot of these mega cap, you do want to have a core exposure there because, you know, they are doing great business. But what we are finding in our conversations with a lot of the retail clients especially is that a lot of them tend to get very over concentrated there. So what we have been cautioning clients is that especially if you saw in the beginning of the year when we did get a pullback, that’s where you got the majority of the pullback. So, again, I think recalibrating the portfolio, recalibration has been the theme for us and improving the breadth in your portfolio is really the key.
05:01 Speaker A
Um, energy in particular is a curious one to me because energy’s been beat up, right? We’ve seen um, underlying energy prices fall, that’s been something that’s been a pressure on many of these companies. Do you think that oil prices need to recover in order for those companies for the stocks to do better?
05:36 Adele Zaman
Well, this is more of a contrarian play for us. We do think that there’s a lot of value there in that sector. The reason being twofold. First of all, you know, because of the deregulation tailwind that we are seeing with Trump unwinding some of Biden’s clean energy policies. And then if you look at all of these trade deals that are being done, right? With European Union committing to invest $750 billion in US energy, with South Korea committing to spend $100 billion in US energy. That is going to benefit some of the large US oil companies like Exxon Mobile that are trading at relatively low valuations and also are paying a great dividend.
06:57 Speaker A
Um, so going back to, um, Powell’s speech for a moment, and, you know, the message he was sending. Um, I’m also curious if you are concerned at all about Fed independence and the implications then for for policy and for the markets going forward.
07:27 Adele Zaman
I think that Powell did make comments about the independence, you know, he did imply that as well, right? So I think that the reason why he’s indicating a rate cut is because that is the right thing to do. And that was evident from the employment report. So I think Powell is going to hold his stance as far as the independence is concerned, but this rate cut was because of the data and I think that that was the right thing, right call for him to do.
08:21 Speaker A
Of course, we still have a couple of big reports before the next Fed meeting, right? We’ve got another jobs report, we’ve got PCE. So is the, I guess, is the September cut a certainty or do you think there are still risks to that view?
08:53 Adele Zaman
I do think there’s still risks to that view. That’s why he didn’t come outright and say that he’s gonna cut, right? So I think there’s still risks to that that happening. If that does not happen, then we can anticipate one of those pullbacks in the market and that is precisely why we’re asking clients to increase exposure in those other areas of the market.
09:32 Speaker A
Gotcha. Adele, good to see you. Thanks for coming in.
