Perhaps the biggest “known unknown” this year is the nature of the Fed’s rate cuts. Once again, this week, Fed Chair Jerome Powell shared that the Fed is looking to cut rates this year. The nature and amount of those cuts, however, will have a significant impact on markets.
Many investors and businesses have already priced in several cuts, but for those looking for a way to adapt quickly to changing signals, active investing may appeal.
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Why might rate cuts play such a big role in the economy this year? Consider tech, for example. Big megacap names like Apple (AAPL) and Microsoft (MSFT) have kept markets moving forward. That has happened despite small cap tech and biotech names struggling with much higher borrowing costs.
While one single change may not debilitate all of AAPL, MSFT, and the other huge tech names alone, that concentration risk matters. Rate cuts would potentially boost a disruptive tech approach. They would also cause more firms to diversify away from those aforementioned stocks, while still sticking to tech.
Active investing via ETFs can help investors ride rate cuts in an intelligent way. Actively managed ETFs can invest across sectors to find the best opportunities and react quickly to events, like rate cuts. An active strategy could quickly find a balance between those big tech names and smaller firms that could benefit from cuts.
At the same time, an active strategy can still find returns if anticipated rate cuts don’t arrive as expected. Sure, the Fed could cut this year, but how many cuts, and when? If the rate cut narrative itself ends up being more toward the end of 2024, active investing can appeal.
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