Jason discusses small caps, emerging markets, and commercial real estate.
Small Caps
On September 18, 2024, the Fed cut its policy rate by 50 basis points. Historically, small-cap stocks have been prime beneficiaries of lower interest rates, with their valuations tending to increase relative to large caps after such cuts. Data shows that after the first rate cut of a cycle, small caps have outperformed the S&P 500 over the next 12 months 70% of the time, with an average outperformance of more than 5%.
Emerging Markets
Lower U.S. rates could provide emerging market central banks with more room to ease their own monetary policies and support domestic growth. Approximately half of the primary 18 emerging markets have already started cutting rates in this cycle, particularly in Latin America and emerging Europe. History suggests that emerging market and world stocks can rally if a Fed rate cut helps the economy avoid a recession. However, performance has been relatively muted if a recession occurs after the first rate cut.
Commercial Real Estate
Lower policy rates are a necessary catalyst for reducing interest rates more broadly, including commercial real estate (CRE) debt costs. Reductions in real estate debt costs have historically led to lower cap rates and price growth. This environment allows real estate companies to increase their investing activity and grow their portfolios, providing more inventory to lease out to customers. The end result should be increased sales and profit growth.
This blog post is intended for informational purposes only and should not be considered as investment advice. Please consult with a financial advisor before making any investment decisions.