With the economy slowing and inflation slowing, Wells Fargo analysts are suggesting that the US Federal Reserve is ready to start cutting interest rates, with a 50 basis point cut expected at its September meeting.
Additional cuts are expected in November and December. The bank said the series of aggressive cuts would make credit cheaper and more accessible, which could stimulate economic activity and growth through 2025.
The bank added that investors will face mutual risks over the next six to 12 months.
On the positive side, they noted, a shift to stronger economic growth and earnings growth by early 2025 would create broader opportunities in stocks and commodities.
However, they point out that potential risks include geopolitical tensions in the Middle East and uncertainty surrounding elections and policies in the United States and internationally.
The bank says global markets have recently started to reduce risks by selling stocks and buying fixed income, which has pushed the value of the yen sharply higher since mid-July.
To hedge against these risks, Wells Fargo recommends rebalancing investment portfolios using the latest decline in short-term interest rates and.
Specifically, they recommend downgrading short-term US taxable fixed income to increase equity exposure and returning high-yield taxable fixed income to a neutral allocation.
They also suggest shifting from long-term US taxable fixed income to medium-term US taxable fixed income to take advantage of the recent bond market rally. In equities, they recommend eliminating tactical shortfalls in US small-cap stocks.
The bank believes that by following these strategies, investors can better position themselves to navigate potential market ups and downs and take advantage of opportunities as the economic landscape evolves.