As a native of the Massachusetts North Shore, I took sailing lessons at an early age. Since the wind direction and strength are constantly changing, a good sailor adapts by adjusting the sail’s angle relative to the wind to maintain forward momentum.

As the Federal Reserve prepares to cut rates, think of your portfolio as a sailboat. To catch the wind just right, you need to tack, i.e. adjust your sails to maximize speed and stay on course.

Whether the Fed delivers a gentle 25 basis point breeze or a stronger 50 basis point gust, your success hinges on your ability to shift your investments in the right direction.

Okay, I won’t belabor my sailing metaphor. If you’ve been following my advice in recent weeks, you’ve already made the proper calibrations. But if you haven’t, it’s still not too late. Below, I’ll show you how to position your portfolio ahead of the Fed decision.

The odds favor a cut…

When the Fed’s policy-making arm, the Federal Open Market Committee (FOMC), meets September 17-18, the overwhelming expectation is that the FOMC will announce a rate cut. The only uncertainty, according to Wall Street bookmakers, is the magnitude of the cut.

The CME Group’s FedWatch tool indicates the odds of the Fed cutting its benchmark rate by 50 basis points this month have risen from 30% to 43%, while the likelihood of a 25 basis-point cut stands at 57%, according to the FedWatch reading as of September 5 (see chart).

Source: CME Group

Historically, the stock market’s response to rate cuts has followed distinct patterns across different time horizons. Let’s look at historical examples in the post-WWII era.

• 2001 Rate Cuts (Dot-com Bust)

The Fed aggressively cut rates following the bursting of the dot-com bubble and subsequent economic slowdown.

Over the near-term (3 months), the S&P 500 fell initially, as the market anticipated worsening economic conditions. Over the medium-term (6-12 months), the market began to recover as corporate earnings stabilized and investors regained confidence. Over the long-term (2+ years), the S&P 500 saw sustained gains once the economic recovery took hold, particularly driven by rebounding technology stocks.

• 2008 Rate Cuts (Financial Crisis)

During the Global Financial Crisis, the Fed slashed rates aggressively to counteract a deepening recession. Near-term: The S&P 500 continued to decline initially due to the magnitude of the crisis, falling by more than 20% in the first 3 months after rate cuts. Medium-term: Markets remained volatile but started stabilizing around a year later as stimulus measures took effect. Long-term: From 2009 onward, the market entered a bull run that lasted over a decade, with sectors like technology and consumer discretionary leading.

• 2019 Rate Cuts (Pre-COVID Slowdown)

Amid trade tensions and a slowing global economy, the Fed preemptively cut rates three times in 2019. Near-term: The S&P 500 responded positively within weeks, rising by about 8% in the following three months. Medium-term: Over the next 12 months, the market rose over 25%, buoyed by lower rates and a strong labor market. Long-term: The rally was disrupted by the pandemic in early 2020, but markets surged again with fiscal and monetary interventions.

Sectoral Response

Near-term winners: Technology, consumer discretionary, utilities, and real estate. Tech often benefits from rate cuts due to higher growth expectations and reliance on financing. Lower rates also boost consumer spending and confidence. Utilities and real estate rely on debt financing and thereby benefit from lower borrowing costs.

Medium-term winners: Industrials, materials, and financials. The first two sectors generally pick up once economic activity increases following the initial stimulus. Though banks experience some margin compression due to lower interest rates, a strengthening economy boosts loan demand and offsets short-term impacts.

Long-term winners: Cyclicals and growth stocks. As the economy recovers, cyclical sectors like consumer discretionary, energy, and financials typically outperform. Lower rates generally enhance valuations for high-growth stocks, especially in technology.

Patterns and lessons for equity investors…

Markets may react negatively in the short term as rate cuts often signal economic weakness. However, once the policy takes hold, markets tend to stabilize.

Growth sectors, particularly technology, tend to perform well following rate cuts, given their reliance on low-cost capital. Rate cuts often prompt a rotation from defensive stocks (e.g., utilities and health care) to more cyclical sectors (industrials and consumer discretionary) as economic prospects improve.

In the long run, a dovish Fed typically supports a risk-on environment, benefiting equities broadly, especially growth-oriented sectors.

You should remain vigilant for potential near-term volatility but recognize that rate cuts historically create a favorable long-term environment for stocks, especially in growth and cyclical sectors. Don’t fight the prevailing wind. In other words, don’t fight the Fed.

In the meantime, the main U.S. stock market indices closed mostly lower on Thursday as follows:

• DJIA: -0.54%
• S&P 500: -0.30%
• NASDAQ: +0.25%
• Russell 2000: -0.61%

The benchmark 30-year U.S. Treasury yield slipped 1.08% to settle at 4.02%, as Wall Street increasingly bets on a rate cut.

The green rush…

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John Persinos is the editorial director of Investing Daily.

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