Survey: Best ways to play falling interest rates, elections and AI, according to investing pros

Investors have a lot of concerns right now – the potential for falling interest rates, the U.S. elections and the emergence of artificial intelligence. How should they play these events?

Bankrate’s Market Mavens survey asked the experts about some of the most important questions for investors in 2024:

• Once the Fed begins cutting rates, how might investors and savers respond when yields or returns on savings are moving lower?

• With the U.S. election ahead, how should investors approach the uncertainty and the variety of potential outcomes?

• What is your view of the market’s enthusiasm around tech stocks and AI, and how should investors with long-term time horizons approach it?

Here’s how the survey’s respondents say investors should approach these issues.

Forecasts and analysis:

This article is one in a series discussing the results of Bankrate’s Second-Quarter 2024 Market Mavens Survey:

• Survey: Stocks to gain 4% over the next year

• Survey: Market pros see 10-year Treasury yield under 4% a year from now

• Survey: Best ways to play falling interest rates, elections and AI, according to investing pros

How the pros respond to falling interest rates

The Federal Reserve has made it clear that it’s poised to move interest rates lower as soon as it sees inflation more consistently moving toward its 2 percent target. With inflation having moved lower, most market watchers think it’s only a matter of time until the Fed cuts rates.

So Bankrate asked survey participants: “Once the Fed begins cutting rates, depending on the timing and trajectory, what are some opportunities and/or risks, unintended (or intended) impacts that investors should consider? Related to that, how might investors and savers think or behave in an environment where yields or returns on savings are moving lower?”

“A lot depends not only when the Fed is cutting rates, but why,” says Patrick J. O’Hare, chief market analyst, Briefing.com. “If it is because inflation has moved toward the 2.0 percent target, but growth is still decent, then there is a lot of opportunity in value stocks and small-cap stocks.”

Top picks here might include the best performing small-cap ETFs.

“If rates are coming down because growth is faltering, or we are in a recession, it won’t be good for stocks in general but probably less bad for the quality growth stocks,” he says. “In this instance, there would be opportunity in Treasuries and cash would be held dear as investors look simply to preserve capital.”

So investors may turn to top money market funds in that case.

“When the Fed starts cutting rates, equities tend to do well, particularly small cap stocks, as they have more floating rate debt than large cap companies,” says Dec Mullarkey, managing director, SLC Management. “As the cost of debt drops, earnings improve as long as economic growth holds up.”

But the pace of Fed rate cuts is also important to the market’s performance, say analysts.

“One concern that investors could have is that even though the Fed begins to cut rates, do they do it too slowly,” says Brad McMillan, chief investment officer, Commonwealth Financial Network. “There have been signs of deceleration in some of the economic data. Investor sentiment could become overly negative if they begin to think the Fed should be more aggressive.”

How should investors respond to U.S. election uncertainty?

A hard-fought presidential election is one of the biggest uncertainties facing Americans this year, but big Congressional shifts could also play out, too. So Bankrate asked: “With the U.S. election ahead, how should investors think about uncertainty (if at all) as well as the variety of potential outcomes, including who wins the White House and how control of Congress is determined?”

Many respondents mentioned key uncertainties surrounding government spending but also noted that stocks tended to go up over time regardless of the political administration in office.

“Volatility tends to increase when the U.S. gears up for a presidential election,” says Mullarkey. “Since markets are very familiar with both presidential candidates, there are fewer unknowns. And the market in general performed well under both.”

Mullarkey recommends sticking to your long-term weighting of stocks and bonds, because “the earnings potential of companies has historically, in the long run, been more critical than the composition of Congress or the occupant of the White House.”

Still, historical returns may indicate which scenario may benefit investors the most.

“The S&P 500 has delivered the highest average annual return during split congresses, with the greatest average return coming from a Democrat president and a split congress,” says Sam Stovall, chief investment strategist, CFRA Research.

But other analysts are strictly focused on the economics.

“Investors should focus on prospects for interest rates and prospects for the economy and earnings,” says Hugh Johnson, chief economist, Hugh Johnson Economics.

And Chuck Carlson, CFA, CEO, Horizon Investment Services, seems to agree: “I would not consider the election in my investment planning.”

Still, other analysts are keeping their eyes on government spending, with the 2017 Tax Cuts and Jobs Act due to expire at the end of 2025. The act drastically rolled back taxes. Continued deficit spending at current levels may finally prove unpalatable to investors.

“The main uncertainty is the expiration of the 2017 tax cuts at the end of 2025,” says O’Hare. “That will require legislative action to continue or change, and the prospects for that will hinge greatly on the composition of Congress, which is obviously unknown at this point.”

“The Democrats are running on increasing taxes and Republicans are running on lowering taxes,” says Kim Forrest, chief investment officer/founder, Bokeh Capital Partners. “I expect that whoever wins will do what they are saying with respect to taxes and regulations.”

Should investors worry about the dominance of tech stocks?

Tech stocks have come to dominate major indexes such as the S&P 500, driving it ever higher in 2024. Much of the narrative surrounding their gains has been about artificial intelligence, and key tech leaders such as Nvidia and Microsoft have made colossal gains over the last few years.

So Bankrate asked analysts: “Enthusiasm regarding some technology names, including AI, has generated much interest of late. What is your view of this dynamic and should investors with long-term time horizons regard this with caution, enthusiasm, or some combination?”

The analysts were generally upbeat about AI as a technology, though they were less sure about how valuations played into its current riskiness.

“Forecasting is hard, especially when you forecast the future,” quips Charles Lieberman, chief investment officer, Advisors Capital Management. “It is clear that AI will be a powerful force, but how much is already discounted? That’s hard or impossible for me to discern right now.”

“What is realizable and over what timeframe will ultimately determine whether investors are right with their current interest,” says McMillan. “There is a lot of money being spent on AI currently and as companies begin to assess their return on these investments future spending patterns will come into view and impact these stocks going forward.”

All that investment provides a lot of opportunities across the economy, not just in the obvious AI and tech stocks, too.

“We believe that the secular themes carry promise and recommend full weightings to technology and communication services,” says Sameer Samana, senior global market strategist, Wells Fargo Investment Institute. “We also like energy, materials, and industrials as ways to play the infrastructure needs of the AI buildout.”

The upside is so great with the emergence of AI and tech that investors should have at least some in their portfolios, say many analysts.

“Investors with a long-term perspective need a piece of the AI and technology trade,” says Carlson.

• Bankrate’s second-quarter 2024 survey of stock market professionals was conducted June 14-28 via an online poll. Survey requests were emailed to potential respondents nationwide, and responses were submitted voluntarily via a website. Responding were: Sameer Samana, senior global market strategist, Wells Fargo Investment Institute; Dec Mullarkey, managing director, SLC Management; Patrick J. O’Hare, chief market analyst, Briefing.com; Sam Stovall, chief investment strategist, CFRA Research; Brad McMillan, chief investment officer, Commonwealth Financial Network; Chuck Carlson, CFA, CEO, Horizon Investment Services; Michael K. Farr, president and CEO, Farr, Miller & Washington; Charles Lieberman, chief investment officer, Advisors Capital Management; Kim Forrest, chief investment officer/founder, Bokeh Capital Partners; Hugh Johnson, chief economist, Hugh Johnson Economics.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.