How to invest after latest rate cut

Experts like stocks over bonds

By Paul R. La Monica, CNN Business
Copyright 2019 CNN

Federal Reserve headquarters building, The Fed.

(CNN) - The Federal Reserve cut rates again Wednesday. More rate cuts might be on the way later this year -- and perhaps in 2020. Here's what investors do to adjust to this lower rate world.

Stocks probably continue to offer the path of least resistance. The Dow and S&P 500 are each less than 1% from their all-time highs.

All of those worries about the inverted yield curve in the bond market a few weeks ago seem to have faded.

And while there are some pockets of weakness in the US economy, consumers are still spending. Retail sales have been strong and the job market is in fairly solid shape.

"Manufacturing is still a soft spot but frankly, the data in the US economy has gotten better in past few weeks," said Ed Keon, chief investment strategist for QMA. "The momentum for the economy might be better than people think."

Keon said that he likes stocks over bonds for this reason. But he still thinks investors should be somewhat cautious. He prefers value stocks over growth stocks because they are better bargains right now and many pay healthy dividends.

Keon also thinks real estate looks like an attractive sector. It should benefit from lower interest rates, and REIT stocks also tend to have very large dividend yields.

Rich Sega, global chief investment strategist at Conning, thinks investors should consider US companies with more domestic exposure in light of concerns about China's slowing economy (partly due to the trade war) as well as worries about Europe.

Sega notes that the American consumer has held up relatively well thanks to a healthy job market. The resilient US dollar also could help companies that generate more of their revenue in America than overseas.

2020 recession worries overdone?

Even though the Fed has been lowering rates, interest rates in the United States remain much higher than those in other countries, and they are negative in parts of Europe and Japan. That has helped prop up the US dollar, which has risen more than 2% versus other currencies this year.

"US stocks look better than international equities because of dollar strength," Sega said.

It seems that fears are starting to wane about the possibility of an imminent recession -- perhaps as soon as 2020.

"This is a time for the market to reassess all the information we've had on our plate. Step back and breathe a little," said David Norris, head of US Credit at TwentyFour Asset Management. "Recession concerns are overdone. We still see moderate growth."

With that in mind, even the more conservative bond investors think it may be time to make bolder bets.

Rich Piccirillo, senior portfolio manager from PGIM Fixed Income, said high yield debt and emerging markets bonds could make sense for investors who want bigger returns.

He added that investors should also look at top quality corporate bonds to hedge some of the risks from owning higher yield securities, pointing out that bonds for banks and utility companies look attractive.

Europe, gold and bitcoin may be places to avoid

Still, investors should be careful about certain parts of the market. Not everything will continue to rally.

Piccirillo said that he'd be wary of European bonds with negative yields, such as German and French debt, for example. They don't offer any hope of a solid return for long-term investors.

Conning's Sega said that he'd also be cautious about recent rallies in commodities like gold and silver -- as well as bitcoin and other cryptocurrencies. He notes that these assets tend to do better over the long-term, when people are nervous. That may no longer be the case.

In fact, the CNN Business Fear & Greed Index is showing signs of "greed" and the VIX, a market volatility gauge that is one of the components of the Fear & Greed Index, has plunged 45% this year as stocks have rallied.

"Gold and bitcoin are more like fear trades that you should pile into if the world is falling apart. But it doesn't feel that way," Sega said, adding that the lack of dividends from precious metals and cryptos should scare off conservative investors seeking the safety of higher yields.

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