When the Federal Reserve cut interest rates by more than the markets expected, it created a dangerous expectation. Stock markets spent nearly all year pricing in a 25 bps cut. Since the Fed cut 50 bps, markets may infer that the next rate in November is 50 bps.
Unless the Bureau of Labor Statistics posts rising inflation (CPI data) and strong job growth, chances are high that the Fed will slash rates in two months.
Investors who relied on short-term Treasury bonds for high interest rate levels need to change their strategy. Add REITs like Realty Income (O), STAG Industrial (STAG), and W.P. Carey (WPC) to the holdings.
Banks are attractive but not at these prices. Toronto Dominion Bank (TD) and Bank of Montreal (BMO) rallied in the last few weeks. The lower U.S. interest rate decreases the attractiveness of the U.S. dollar. Investors may capture the benefits of a strong dollar by holding TD and BMO stocks.
Telecom stocks are supposed to rise after interest rate cuts. However, AT&T (T) is already 53% above its 52-week low. T-Mobile (TMUS) trades at a premium and Verizon (VZ) needs a pullback. In Canada, BCE (BCE) is trending higher while Rogers Communications (RCI) is range bound. Both stocks trade at fair value.
