Today is Friday, an opportune time for inbox maintenance. Welcome to my latest “Letters to the Editor” dispatch, where I cherish every thoughtful missive you send my way.

In a world where even the most riveting streaming television series can be abandoned mid-season, and social media posts are fleeting, it’s truly heartening to receive your emails.

Each letter that graces my inbox is like finding a gem in a haystack of emojis and GIFs. Your willingness to take a moment to share your thoughts with me is a testament to your commitment and engagement.

So, thank you for proving that even in this era of rapid scrolling and short attention spans, you still care enough to sit down and write. Let’s get down to business.

The Fed’s imminent rate cut…

“It’s almost certain that the Fed will cut interest rates at its next meeting September 17-18. What’s the best way for me to position my portfolio ahead of time? I’ve already increased my exposure to stocks that benefit from lower rates, such as REITs. What else can I do?” — Harold K.

With the Fed likely to cut rates at the September meeting, you’ve done well by increasing exposure to sectors like real estate investment trusts (REITs), which historically benefit from lower borrowing costs.

You might consider diversifying further into high-yield dividend stocks. Utilities and consumer staples also tend to perform well in low-rate environments due to their stable earnings and attractive yields.

You also could add exposure to growth stocks, particularly in the technology and consumer discretionary sectors, because these companies typically benefit from cheaper financing and improved consumer spending.

Finally, consider looking into bonds or bond proxies, because lower rates will boost their prices. However, remember to maintain a balanced portfolio and not overexpose yourself to any single asset class.

Making sense of AI mania…

“There’s so much hype surrounding artificial intelligence. Should I be wary of AI? Wall Street seems to be getting cautious about this trend, as evidence by the hits Nvidia (NSDQ: NVDA) has been taking lately.” — Richard L.

AI has indeed become a hot topic, with some valuations soaring to extreme levels, especially for companies like giant chipmaker Nvidia. However, while Wall Street may be cautious in the short term, the long-term growth prospects for AI remain strong.

AI is expected to revolutionize various industries, from health care to manufacturing, making it an essential driver of future innovation.

That said, it’s wise to avoid chasing overheated stocks and instead focus on companies with strong fundamentals and diversified revenue streams. Consider looking beyond the obvious leaders like Nvidia, toward firms developing AI infrastructure or applying AI in practical, profitable ways. In any industry, I’m always keen on the picks-and-shovels plays.

When assessing an emerging technology, it’s essential to strike a balance between enthusiasm for its potential and a clear-eyed analysis of valuations. The dot.com boom-and-bust of the late 1990s is an object lesson in this truism.

The crude facts…

“Crude oil prices have taken a tumble lately. Is the drop temporary or will we see energy demand destruction in the coming months, further pressuring crude? I suspect that economic growth will eventually shore up oil prices. What’s your view?” — Jim G.

Crude oil’s recent drop reflects concerns over decelerating economic growth and geopolitical tensions. However, it’s important to consider that supply factors, such as OPEC+ production cuts and ongoing disruptions, can still tighten markets.

In the short term, prices may remain volatile as markets react to both weak demand and potential supply shocks. That said, your suspicion that economic growth could eventually support higher oil prices is valid, particularly as major economies recover and energy demand picks up.

The multi-year push toward infrastructure spending is likely to fuel demand for crude. The key is to remain patient and consider that oil prices typically move in cycles. As an investor, maintaining a long-term view and keeping an eye on global macroeconomic indicators will be crucial. Focus on energy stocks with strong balance sheets and diversified operations.

Red, blue and green…

“Kamala Harris is leading in the polls against Donald Trump. The analysts on channels like CNBC are expressing great wariness over Harris. Should I be worried about my portfolio if the Democrats recapture the White House?” — Susan S.

If Democrat Kamala Harris wins the White House, certain sectors may face headwinds. Some analysts are concerned about tighter regulations and higher taxes, particularly for tech, energy, and pharmaceutical companies. However, other sectors like renewable energy, infrastructure, and health care services could benefit from Democratic policies.

Regardless, tune out the braying of political partisans on cable television. If you make investment decisions based on the opinions of the fatuous blowhards on channels like CNBC, you’ll lose money. They’re the Wrong Way Corrigans of the investment world.

It’s important not to overreact to political shifts. Historically, stock markets have performed well under both Democratic and Republican administrations. Wall Street cares more about green than red or blue.

While short-term volatility is possible, maintaining a diversified portfolio is key to weathering political changes.

Consider reviewing your exposure to sectors that may face stricter regulation and think about increasing exposure to areas like clean energy, which could thrive under a Democratic administration. This election promises to be tight, so it’s foolhardy to pick a winner in advance. We learned that lesson in 2016.

Look at the hard data, not perception bias. Perception bias is a type of unconscious bias that occurs when our perception is skewed based on inaccurate and overly simplistic assumptions. The media thrive on perception bias. Fox News caters to the right, MSNBC caters to the left…but you need to focus on reality, which usually resides in the middle.

The following chart may challenge some of your assumptions. The chart looks at S&P 500 sector dispersion and average performance since 1990 under Democratic presidents (19 years) and Republican presidents (15 years).

As you can see, average returns were higher in all 11 sectors during Democratic administrations than Republican administrations:

Sources: FactSet, J.P. Morgan Asset Management. Data are as of December 31, 2023.

However, each administration has faced certain historical anomalies that make broad interpretations problematic. Focusing on companies with strong fundamentals, regardless of political winds, will help you smoothly navigate any political transition. The state of corporate earnings and the economy, not political polling, are the keys to finding profitable investments.

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John Persinos is the editorial director of Investing Daily. You can reach John via mailbag@investingdaily.com

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