Monetary policy: These stocks will shine when the Fed finally cuts interest rates

America's industry is stuttering. And while the job market is returning to the pleasant reality after its happy hour, inflation continues to fall. What is the argument against interest rate cuts now? Nothing! The Fed immediately gives jobs priority over price stability. Because the Fed knows that by the time the interest rate cuts reach the economy, it could already be in recession.

Jerome Powell did try to be verbally moderate in order to make his upcoming interest rate reversal appear more cautious. He is the chief diplomat among all central bankers or – with all due respect – could one perhaps also call him Chief Silvertongue? But you don't need the Oracle of Delphi to know that the US interest rate reversal will begin on September 18th.

And so the financial markets are currently pricing in interest rate cuts at each of the next five Fed meetings. Depending on how inflation and the labor market develop, cuts of as much as 50 basis points are also possible.

Confirmation of the American interest rate cut twilight comes from the appliance market, where the US dollar is unusually weak against the euro.

Will Japan be the monetary policy spoilsport?

The Fed's interest rate reversal is like the icing on the cake for the stock markets. But the Japanese central bank is apparently leaving a bad aftertaste. For many years it was the world's liquidity machine. No wonder, as the low interest rates worldwide caused the yen to depreciate and made Japanese borrowing and investments in higher-yielding international asset classes a lucrative business.

On August 5, when the Tokyo central bank raised interest rates even minimally and thus increased the value of the yen, the end of the liquidity paradise seems to have been heralded for many investors.

But how realistic is this scenario? The Japanese inflation rate has risen in recent months, which suggests that central bank interest rates will continue to rise. But since Japan's national debt is several times the size of its economic output and is so devastating that the Americans look cute in comparison, the urgent question is how Japan will recoup higher financing costs.

The “point of no return” has long been reached. Isn't higher inflation “desirable” in order to get rid of debt in a graceful manner? America has mastered this practice for many decades, if you look at the actual inflation, not the official one. In this respect, neither an interest rate nor a yen revolution is to be expected in Japan.

How do the capital markets react?

Low interest rates increase the return on leveraged investments. Credit-loving Americans can also get new money more cheaply. Both increased corporate profits and thus filled the fundamental troughs of the stock markets.

Last but not least, interest rate markets close to money markets are becoming less attractive compared to riskier stocks. Nevertheless, the economic recovery resulting from interest rate cuts is creating lucrative price potential for corporate bonds.

Gold is also shining brighter as its disadvantage of not offering any ongoing interest is losing its negative weight. And cryptos are also drawing nectar from the interest rate turnaround.

The Fed has a heart for small caps

Of course, interest rate cuts by the Fed are proof that the US economy is no longer running smoothly. And in fact, the performance of US stocks from the second and third tier, which are particularly sensitive to economic trends, has so far been like the fall of Rome compared to the booming high-tech stocks. But stock markets are not one-way streets, neither up nor down.

The small stocks are more dependent on financing and therefore react much more sensitively to interest rate cuts than the blue chips. And they are obviously already putting on weight. During the US reporting season for the second quarter of 2024, around 90 percent of the companies in the Russell 2000 were able to increase their profits by an average of 19 percent compared to the previous year, despite stagnating sales. Their cost management is already working well.

How positively will the expected increase in sales have an impact on profits and margins when the Fed's economic stimulus kicks in? A resumption of outperformance by small versus large is to be expected. The Fed has cleared the way for this. We investors should follow it.

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