SA Asks: How should investors position portfolios ahead of Fed vote?
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The Federal Open Market Committee is slated to meet again next week, with a decision on whether to lower rates expected on Dec. 18.
While many market watchers have been anticipating another rate cut, a recent uptick in the inflation rate has fanned speculation that the FOMC may leave rates as they are.
Which brings us to today’s SA Asks question: How should investors position portfolios ahead of the Fed vote?
We asked Seeking Alpha analysts Justin Purohit, Jacob Hess of MTS Insights and Manika Premsingh for their thoughts.
Justin Purohit: With equity markets trading at elevated P/E multiples above 20x in the major indexes, I favor defensive and value-focused positioning around the Fed vote. I believe pharmaceuticals, particularly Pfizer (PFE), offer compelling risk-adjusted value, alongside underperforming dividend payers like Dow Chemical (DOW) and LyondellBasell (LYB). Discount retailers such as Dollar Tree (DLTR) and Dollar General (DG) may also appeal to value-oriented investors.
Jacob Hess: The FOMC’s Summary of Economic Projections is likely to be the market mover at the end of the December meeting. I expect some hawkish shifts in the projections, including a slightly lower median forecast for the 2025 unemployment rate (to 4.2% or 4.3%) as well as higher median forecasts for the 2025 PCE and core PCE inflation rates (each up about 0.1 to 0.2 ppts).
In response to that, the Fed funds rate forecast for 2025 (and possibly even 2026) will also be tweaked higher by about 25 to 50 bps. The bond market has largely priced in some of this hawkish readjustment, but medium-term Treasury yields (1-year, 2-year, and 3-year) might still feel some upward pressure.
As for equities, I expect a more mixed immediate reaction that is likely to tilt red. Interest rate-sensitive stocks like small caps (IWM), biotech (XBI) and consumer discretionary (XLY) may be the most affected if there is selling pressure. My reasoning for a mixed response in equities is that fiscal policy expectations are still moving investors as Trump’s first 100 days approach.
Manika Premsingh: The markets put a high probability on a 25bps cut in the next meeting, which means that the cut is already priced in. However, the CPI inflation figure does give room for contrarian positioning as the markets can dip if the expected cut isn’t delivered. Whichever way the Fed decides to turn in December, though, it’s clear monetary easing is now well underway. And it might be a good idea for investors to consider the broader macroeconomic context for 2025 right now to position their portfolios.
The year might be far less uncertain and far easier than it has been in the recent past, barring any unexpected geopolitical developments. Stocks across sectors can benefit, as a result. However, with an over 26% increase in the S&P 500 this year, valuations have run up, too. So, a focus on specific sectoral macroeconomic conditions coupled with a consideration of individual stock metrics can hold investors in good stead.