Traders jumped on the word from the Fed this week that there might be interest rate cuts — plural — next year.
Stocks rallied pretty much across the board for big profitable companies, and for the smaller, not-so-profitable ones too. Other risky assets — cryptocurrency, for example — have been on the rise as well.
All this on the assumption that the economy is going to keep chugging along and that the cost of borrowing will fall. But that assumption could easily prove wrong, too. So why are some investors feeling eager to make risky bets?
It’s not exactly the meme stock, SPAC, NFT mania of early 2021, but recently, some investors have been buying more stock in certain kinds of companies.
“Technology companies that don’t earn any money. They are profitless,” said Ross Mayfield, an investment strategy analyst at RW Baird.
He says those kinds of tech firms make for risky investments because they have to borrow a lot of money to keep going. But if the cost of borrowing falls next year, they could do well, Mayfield says.
“If you’re a younger, more growth-oriented company, higher rates are a bigger weight and lower rates are a bigger boon,” he said.
And buying stock in those companies could be a boon for investors, too. Mayfield says right now, those investors have a lot of money sitting in safer accounts that they could throw into riskier bets.
“There’s still fuel for this fire to keep going. There’s something like $6 trillion in money market funds right now,” he said.
All that stored up cash has investors eager for any sign that the Fed is going to cut rates. So eager, they may be hearing things that the Fed isn’t actually saying. Things like…
“We are 100% done. Don’t worry about it. Next time you hear from us and the rates move, they are going down. And by the way, that will be in Q1 2024,” said Sarah Kunst, managing director of Cleo Capital. “None of those words are coming out of Jerome Powell’s mouth, but the market moves like they are.”
Investing in riskier companies and assets now could pay off if those rate cut dreams come true, says Mayra Rodriguez Valladares, managing partner at MRV Associates.
“(But) I think that there is a high risk that the investors who are all jumping in right now could be quite exuberant,” she said.
They could just as easily get burned in 2024, says Kent Belasco at Marquette University. Not just by a change in monetary policy, but geopolitics too.
“We’ve got what’s going on in Israel, we’ve got Ukraine,” he said.
Add in a presidential election, and that’s a lot of risk.
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