The notion that interest rates will fall in early 2024 presents a problem for investors holding cash. Cash-equivalent assets – money market funds – pay 5.0% or more. Lower rates will hurt risk-free returns on cash.
Should investors put money into fixed income? Bond prices rose significantly. Preferred stock, banks, pipelines, and REITs are all up. Moving cash to those assets is too late a move. Risks are high that the Federal Reserve may change its dovish stance.
A high inflation report, strong job report, and rising home price report would force the Fed to keep rates unchanged. It cannot afford to cut rates, initiating another round of rising home prices.
Worker strikes may start again. After strikes led to higher wages for actors, writers, those in the trucking industry, and automotive, workers in high-demand sectors may go on strike. This will result in sticky or permanent inflation. To prevent this risk, the Fed needs to leave persistently high interest rates acting against the economy. A slowdown would remove the worker’s position of demanding higher pay.
Your Takeaway
Bonds already rose while Treasury bonds may have some upside left. Companies with tremendous profitability expansion ahead also have more upside than bonds or T-bills. The mega-cap technology firms like Apple (AAPL) and Microsoft (MSFT) are examples of highly profitable firms.
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