What we’re Seeing in the Economy and How it Relates to your Financial Portfolio by Linc Wealth

You may have seen that the Federal Reserve cut interest rates again by 0.25%, marking the resumption of a rate cutting cycle that started last year. This is making headlines in the financial news, so it offers a good opportunity to discuss what we’re seeing in the economy and how it relates to your portfolio. Contact Becky to continue the conversation.

Why the Fed Rate Cut Matters

First, it is important to acknowledge that while each economic cycle is unique, they are a normal part of investing. Interest rate cuts are generally supportive for long-term investors, while hikes can potentially put pressure on markets. However, it is also important to consider the reason why the Fed cuts or hikes. Specifically, rate cuts often happen in response to an economic crisis or weakness, with the Fed stepping in to stimulate growth.

What is unique today is that the Fed's latest decision comes at a time when markets are reaching new all-time highs. Specifically, the Fed is watching and responding to a softening economy at the same time as corporate America is growing. There is a related saying, "don't fight the Fed," which means that when the Fed makes a move, it's usually wise to pay attention.

The Economic Picture: Mixed Signals

Right now, the economy is mixed, showing both strength and areas of potential concern. On the positive side, the economy continues expanding at a steady pace of 3.3% per year, unemployment remains low at 4.3%, and corporate earnings are expected to grow over 10% this year.

However, job growth has slowed recently, with only 22,000 new jobs added last month compared to expectations of 75,000. While this cooling is worth watching, it's different from the dramatic unemployment spikes we see during recessions.

Meanwhile, inflation has improved significantly from its peak but remains above the Fed's 2% target. This creates a balancing act for policymakers as they try to support growth without reigniting price pressures.

What This Means for Your Investments

For investors, the critical distinction is whether rate cuts coincide with recession or support continued expansion. While there are some signs of economic softening, there are not yet signs of a recession. In these situations, rate cuts typically provide broad benefits across financial markets.

Of course, this can all change quickly and markets never move in straight lines, but the reasons for this historical pattern are:

For businesses, lower rates make it cheaper to borrow money for expansion, equipment purchases, and day-to-day operations. This can boost corporate profits and growth prospects.

For consumers, lower rates typically mean reduced costs for mortgages, car loans, and credit cards, which can increase spending and economic activity.