The Time has Come for Policy to Adjust (2024)

These could be words from FOMC Chairman Jerome Powell that could be remembered for a long time.

The markets, and I refer to the SPY as my representation for ‘the markets,’ had been a hair higher for the week going in to today’s day of trade in which all eyes and ears were going to be pinned to FOMC Chair Jerome Powell and his talk at the Fed’s annual retreat.

Things looked like they were possibly going to reverse after the bearish engulfing formation the prior two days with Thursday’s range of trade swallowing up the Wednesday range of trade the day prior.

Fed Chair Powell said what many were expecting him to say regarding potential upcoming rate cuts.

And that was what the title of this article reads and that is ‘The Time has Come for Policy to Adjust.’

The markets were anticipating the FOMC Chair to announce what they planning to do in the upcoming September meeting and likely future meetings. And that is to issue an interest rate cut – at least almost assuredly in their next meeting September 17-18.

Chairman Powell did, in a sense, give him and the committee an out in that he didn’t exactly say for how much the rate cut was going to be. Some are anticipating a 50-basis point cut. Some say that may spook the markets and at least a 25-basis point cut will be good for now. I even hear we may be in store for 100-basis point worth of cuts over multiple meetings.

Rate Cuts Take Awhile to Work Through the Economy, but the Reaction to it Being Done can Affect Things Quicker

No matter where you stand on how many basis points you see coming don’t expect any immediate economic impact as it usually takes about 12 months for that to happen.

The fact that an announcement is/was made can cause the market to move right away, but that is more of a quick, short-term reaction. It is more of a trade the news type of situation more so than a long-term investment decision; and if it is it may be an initial push into securities, or a batch of securities investors would feel will benefit with lower borrowing rates. And as the impact of the rate cut works its way through in a positive fashion over time then more and more money could be added to those sectors the initial influx of cash went.

Sectors that Could Benefit from Lowered Interest Rates

Or should I say continue to benefit from upcoming lowered interest rates.

Take a look at the image of the sector performance on the day provided by www.sectorspdr.com.

The top performing SPDR Sector ETF on the day was the XLRE. This is the Real Estate Select Sector SPDR Fund.

This sector was actually tied for the top performing Sector SPDR ETF with the XLY, which is the Consumer Discretionary Select Sector SPDR Fund.

Honorable Mention Sector for Today XLK – Technology (it was the next best percentage performance on the day).

The difference between the two ETF’s though and why I mentioned ‘the sector that could continue to benefit’ is because the XLRE is at highs not seen since back on September 05 of 2022 and ramped even further today to another multi-year high.

XLY had a strong day but is off from their all-time highs.

Between the two I would be looking for opportunity in the holdings for the XLRE under the guise that strength begets more strength, and we could see some of these securities in this ETF continue a higher price run.

What you can do on that website is click on the ETF line item and when the page refreshes, click on the holdings hyperlink and it will bring up a list of the holdings or securities that make up the ETF and give you the respective weightings of each in the ETF and other data for it.

One can also click on a link to bring up the whole list of securities in this ETF in either a csv file or a xls type file. From there one can save the list to their computer, print it out hard copy or both.

An example of some of the holdings is American Tower – (AMT) and Prologis, Inc. – (PLD).

The ETF is also a security that trades options on it and can be considered for trading or investing.

It looks like it already made its move in anticipation of pending rate cuts becoming reality so you either have to accept you would be getting in at or near the top of the move or wait for a pullback to a place where a previous resistance becomes a new support.

If you sense more upside once the cut actually happens a couple of options strategies that can be considered are long calls or selling of a cash secured put.

Cash Secured Put

This option strategy generates premium in to the account that you either keep and NOT have to take the stock at expiration for the option OR you get ‘put’ the stock – have to take the stock at the sold strike but keep the sold put premium as well. It is called cash secured because your broker would likely require the account to have the amount of capital in it ahead of time should it get assigned or ‘put’ to stock.

This would reduce your basis on the stock and now you own shares you can hold and consider writing covered calls on if you own increments of 100 shares.

Wait and See on How the Fed Executes it’s Rate Cut Process from Here

I am still leaning bullish and this potential new adjustment to policy has me still believing in he markets higher. I do see some seasonal bearishness but believe that to be through the rest of August and what is typically a rough September month for the markets and then we get back to more bullish seasonal patterns the last part of the year.

What the FOMC does, meaning how many times it cuts and how aggressive they cut will dictate how well the market performs, from a robustness and rate of speed perspective.

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