The Fed is behind the curve. There’s still no need to panic.
Summary
Instead of blindly selling, investors should eye sectors like real estate that will benefit from lower interest rates.
Federal Reserve Chair Jerome Powell said Wednesday that he needs to see more data to justify cutting rates. The data obliged, but is hardly signaling disaster.
Friday’s jobs report revealed weakness across multiple dimensions: The 114,000 jobs added in July missed expectations; earlier months’ gains were revised downward; and year-over-year wage growth of 3.6% was softer than 3.8% in June.
Worries are building that the Fed has fallen behind and should have already started cutting. These concerns are exacerbated by the fact the Fed isn’t scheduled to hold rate-setting meetings in August or October, giving it a narrow path ahead to get rates down. Off-calendar moves are possible but rare, usually reserved for emergencies.
Fed funds futures are pricing in a greater-than 70% chance of a 0.5-percentage-point cut, twice the usual increment at the September meeting, up from 15% just days ago, according to the CME Group’s FedWatch tool. But markets took little solace from this. Stocks and Treasury yields sank Friday.
Still, investors shouldn’t lose their heads. Yes, the labor market is weakening. But the economy is hardly in dire straits. Gross domestic product rose at an annual pace of 2.8% in the second quarter. A 4.3% unemployment rate is at fundamentally healthy levels.
There was even some good news in Friday’s report—that the labor-force participation rate kept rising in July. In perhaps the best news for the long-term economic outlook, data Thursday showed worker productivity in the second quarter rose at a brisk 2.7% pace from a year earlier.
What is more, never forget that once the Fed makes up its mind to move, its firepower is formidable. With rates as high as they are, there is plenty of room for them to come down. Expect Fed officials to start sending more dovish signals long before the September meeting.
So instead of raging at the Fed and mashing the “sell" button, investors should consider opportunities that are now emerging. There are, of course, sectors that benefit from lower rates, like real estate. Especially in a still-healthy economy, this sector could take off.
Mortgage originator Rocket Cos.rallied 12.3% Friday on expectations that lower rates could unlock the housing market, while rivals loanDepot and UWM Holdings rose 11.3% and 8.1%, respectively. That is encouraging. If home purchases pick up, there is a whole adjacent economy from home retailers to materials that would benefit.
Consumer staples have had a rough run lately, but their relatively high dividend yields get more attractive as rates fall. Low-income consumers who have been cutting back and switching to private label, a major concern for the sector, could get a break from rate cuts on credit-card and auto payments. Many consumer companies also have substantial overseas earnings that will be worth more if the dollar declines.
Even in recently overheated sectors like technology, panic selling could throw up opportunities. If you believed in the transformative promise of artificial intelligence last week, you shouldn’t be deterred now at lower prices. Ultimately, lower rates, whenever they come, will make it easier to finance the build-out of AI data centers, as well as clean-energy production and other transformative technologies.
The Fed might be taking August off. Investors can start preparing for a lower-rate future now.
Write to Aaron Back at aaron.back@wsj.com
