Saving in dollars (USD) has never been the best option, considering that other financial assets offer greater profitability despite their risk. However, this particularity has greater relevance with the current macroeconomic environment, according to a report from the JP Morgan bank, made by Kenneth Datta, global investment strategist.
“Holding cash during an interest rate cut cycle can result in losing potential gains from other asset classes,” warns the bank. Therefore, suggests looking beyond the current volatility in financial markets.
The recent interest rate cut in the United States “could have wide-ranging effects on various asset classes,” Datta highlights. This is the first reduction in more than four years, which signals the beginning of a new phase. Therefore, it is crucial to understand how the various markets could react to position portfolios.
Historically, interest rates have been cut to stimulate economic growth during periods of economic slowdown and uncertainty. This policy “reduces the cost of borrowing, encouraging businesses to invest and consumers to spend, which can help boost economic activity,” he clarifies.
Consequently, multiple asset classes tend to react highersuch as stocks and bonds issued before the cut. Although, it should be noted that these are not the only ones. This environment has historically also favored the rise of gold, as well as bitcoin (BTC) and cryptocurrencies.
The rate cut represents a change for financial markets
When interest rates are cut, yields on Treasury bonds typically decline as new ones become less attractive compared to existing bonds with higher yields. Therefore, its profitability tends to outperform cash in an environment of monetary relaxation.
“Equities also tend to perform well during rate cut cycles, especially if the economy is expected to achieve a ‘soft landing,’” the JP Morgan report mentions. It should be noted that this last term refers to a scenario in which economic growth slows down, but avoids a recession.
The analyst says lower interest rates reduce borrowing costs for companies, which could boost profits and stock prices. “Quality equities can offer attractive opportunities in this scenario,” he points out.
In addition, he emphasizes that the rate cut leads to a drop in cash deposits, which makes it a less attractive investment compared to other asset classes. In fact, The dollar has underperformed core bonds and equities in 10 of the last 12 tapering cycles.as the table shows.
The scenario of interest rate cuts usually motivates risk demand. For this reason, highly volatile assets such as bitcoin and cryptocurrencies have responded upwards to periods like this, which raises optimism for their continuity, as reported by CriptoNoticias.
Although, it should be noted that this measure also reflects economic weakness, so the impact on the markets depends on their development. That is also why, in the face of such uncertainty, precious metals such as gold tend to rise because they do not depend on a particular economy, something that is also influenced by geopolitical tensions, such as the recent escalation of war between Israel and Iran.
Consequently, given the recent start of a period of rate cuts, The JP Morgan report mentions that it may be a good idea to consider reallocating excess cash to other assets. It is important to evaluate this decision based on individual risk tolerance, investment objectives and time horizon, he clarifies.
“The first rate cut of the current cycle signals a change in monetary policy aimed at supporting economic growth,” he maintains. As a result, “investors who hold a significant portion of their portfolio in cash could lag behind those who allocate higher-yielding assets over the long term,” the report concludes.
Clarification: This article was written for informational purposes. It does not represent a financial recommendation or investment advice. Each investor is responsible for doing their own research.
