In an environment marked by geopolitical strife and a fragile recovery from the pandemic, the Federal Reserve has grappled with the difficult task of balancing growth and inflation. And despite the persistent carping of economic doomsters, the Fed seems to have pulled it off.

When the Fed announced its decision Wednesday to pause interest rate hikes, the immediate response from Wall Street was a mix of relief and optimism. Fears that the Fed would go too far in fighting inflation (fears that I once shared) have not materialized. The economy is expanding, inflation is falling, consumers are spending, employers continue to hire, and the Fed is probably done raising rates.

Say hello to the “soft landing,” a feat considered highly improbable just a few months ago.

Even Fed Chief Jerome Powell, who has an unfortunate habit of talking down the markets, has gotten the memo. At his post-announcement press conference, Powell weighed his words carefully and didn’t say anything to freak out investors.

Powell said Wednesday that the Fed is hoping for “a continuation of what we have seen, which is the labor market coming into better balance without a significant increase in unemployment, inflation coming down without a significant increase in unemployment, and growth moderating without a significant increase in unemployment.”

Wall Street currently expects the Fed to actually start cutting rates sometime in mid-2024, a pivot that would give stocks a shot of adrenaline.

Stocks are generally in an uptrend, but winners and losers are emerging, based on a particular industry’s sensitivity to interest rate fluctuations.

Traditional interest rate-sensitive sectors, such as real estate and utilities, are enjoying a tailwind as investors expect a decline in the cost of borrowing. Additionally, technology stocks, which often thrive in low-interest-rate contexts, are back in vogue.

Conversely, financial stocks face headwinds as the pause in interest rate hikes limits the potential for banks to widen their net interest margins.

While equity markets have exhibited a positive reaction to the Fed’s more dovish stance, the fixed income markets tell a different story. Bond yields, which move inversely to bond prices, are fluctuating as investors reassess their expectations. The pause on rates is causing a reassessment of the duration and risk profile of fixed income portfolios, prompting some investors to reallocate their assets in search of better returns.

The Fed stands pat…

At the conclusion of its two-day Federal Open Market Committee (FOMC) meeting Wednesday, the Fed proclaimed its intention to leave its benchmark fed funds rate unchanged. The rate currently hovers at 5.33% (see chart).

According to the FOMC’s latest Summary of Economic Projections, released Wednesday, the median projection for the appropriate level of the fed funds rate at the end of 2024 is now 4.6%, meaning that FOMC officlals members are currently expecting three 0.25% rate cuts for next year, followed by further cuts throughout 2025 and 2026.

For me, a key takeaway is that FOMC policy makers don’t expect a significant increase in the unemployment rate for at least the next three years. Take a look at the following chart, which tells a bullish story:

As investors navigate the terrain shaped by the Fed’s latest policy moves, several salient implications emerge:

Opportunities in Equities. Sectors that traditionally benefit from low interest rates, such as technology and growth stocks, will continue to present outsized opportunities in 2024 for investors seeking capital appreciation.

Fixed Income Challenges. Fixed income investors face the challenge of compressed yields. Diversification and a focus on credit quality will become essential strategies next year to mitigate risk.

Sector Rotation. The performance of different industries can vary based on their sensitivity to interest rate movements. A nimble approach to sector rotation is crucial for optimizing returns. The laggards of 2023, e.g. utilities stocks and real estate investment trusts (REITs), are poised to become leaders in 2024.

Geopolitical Considerations. Given the interconnected nature of global markets, geopolitical events can significantly impact investor sentiment, reinforcing the importance of a diversified portfolio.

The Israel-Hamas and Russia-Ukraine wars show no sign of abating and their dislocations could expand into other regions. The successful efforts this week of Republicans on Capitol Hill to block aid to Ukraine suggests that country’s conflict with Russia will only become bloodier and more unstable, with no end game in sight. The antagonists in the Middle East are equally implacable.

Inflation Watch. Yes, inflation is falling, both at the consumer and wholesale levels. However, the pause on interest rates does not negate concerns about inflation. Investors should remain vigilant to inflationary pressures and consider allocating assets in a way that hedges against the erosion of purchasing power.

You should feel confident enough to reduce the inflation hedges portion of your portfolio, but don’t get rid of it altogether.

Gold deserves a place in your portfolio, as a hedge against inflation and crisis. Under current market conditions, about 15% of your allocations should be in hedges and 5%-10% of your hedges sleeve should be in precious metals such as gold. Prices of the yellow metal are at record highs and they’re set to rise even further in 2024.

Stocks are breaking records as well. The main U.S. stock market indices closed higher Thursday as follows:

• DJIA: +0.43%
• S&P 500: +0.26%
• NASDAQ: +0.19%
• Russell 2000: +2.72%

The Dow Jones Industrial Average hit a fresh all-time high, building on its record close of Wednesday. The 10-year Treasury yield fell below 4% for the first time since August.

Further cheering investors was the Commerce Department’s retail sales report for November, released Thursday, which showed a month-over-month increase of 0.3%, versus the consensus estimate of a decrease of 0.1%, and the actual decline of 0.2% in October.

Americans in polls are saying we’re in a recession, but they sure aren’t acting like it.

Customized realities…

We’re not completely out of the woods yet, but Jerome Powell may have cemented a positive legacy for his tenure as Fed chief.

The latest figures show the unemployment rate was only 3.7% in November, historically a remarkably low rate. Economic growth accelerated in the three months through September (the third quarter), with gross domestic product climbing at a 4.9% annual rate.

Meanwhile, the consumer price index (CPI) in November fell to an annualized rate of 3.1%, inching ever closer to the Fed’s target of 2%.

Partisan differences persist when it comes to economic perceptions. Americans occupy “bespoke realities,” depending on their favored media outlets.

For instance, remember all the whining by some pundits earlier this year about the high cost of eggs? In recent months, egg prices have fallen harder than Humpty Dumpty, but egg inflation has been abandoned as a political talking point.

We’ve seen the same dynamic with gasoline prices. We heard lots of howling when gas prices were rising, but now that they’ve been falling for 10 straight months, the sound you hear is crickets.

The “transitory” school of inflation has been vindicated; it only took a little longer than expected. Regardless, the facts point to one conclusion: the dreaded recession is a no-show.

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That said, risks haven’t disappeared. They never do. If you’re looking for proven ways to make money with mitigated risk, I suggest you consider the advice of my colleague Jim Pearce, chief investment strategist of Personal Finance.

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John Persinos is the editorial director of Investing Daily.

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