As speculation about rate cuts intensifies, investors are preparing their portfolios, according to an update from eToro.
According to data from the Retail Investor Beat from trading and investment platform eToro, 55% of US retail investors are “adjusting their investment portfolio in anticipation of the Fed cutting interest rates.”
Investors most actively anticipating cuts “are those under 45 years old, as 78% of investors aged 18-34 and 81% of investors aged 35-44 have either already adjusted their portfolios for rate cuts or plan to take action in the near future.”
Signs that US investors are “preparing for rate cuts were also visible in the way that more investors reported holding sectors such as discretionary consumer goods and staple consumer goods, both of which stand to benefit from rate cuts.”
Financial services and tech remained “the two most held sectors by US retail investors. However, despite big tech’s recent market dominance, a significant number of investors (24%) – particularly the younger cohorts – say they intend to scale back investments in the so called ‘Magnificent 7’ tech stocks this year.”
The trend suggests that forecasts of “a potential 2024 market rotation away from big tech are hitting home with some investors.”
eToro analyst Bret Kenwell said:
”Younger investors appear to be taking a more opportunistic approach to their portfolios as the rate cut discussion heats up. With younger investors looking to start or continue building wealth, the prospect of lower interest rates presents an opportunity to ride cyclical sectors to a bull market. It also gives space for more companies to shine, outside of the recently dominant Magnificent 7, who were able to weather the high rate environment where others struggled.”
To prepare for the rate cut cycle, 40% of US retail investors “indicated that they would hold less money in cash assets.”
However, investors are still holding “onto their cash assets for the time being, potentially to capitalize on the better savings rates associated with high interest rates before they disappear. Nearly four out of five (77%) investors reported holding cash, a 6% increase from Q4 2023, as uncertainty around the first rate cut grew throughout the beginning of 2024. Moves to hold onto cash come as 24% of retail investors cited inflation as the biggest threat to their portfolios, tied with the state of the US economy.”
Even with these lingering concerns, 73% of investors said “that they were confident in their investing portfolios, including 80% of male investors.”
Confidence in investing portfolios “was down 7% quarter-over-quarter amongst women, but two thirds (66%) of female investors still expressed confidence in their portfolios amidst pesky inflation and uncertain macroeconomic conditions.”
Bret Kenwell adds:
“Retail investors continue to show sophistication in managing their portfolios by investing in sectors that stand to benefit from rate cuts, while also maintaining cash assets in the current high interest rate environment. This sophistication can help explain why investors are confident in their portfolios, even as inflation appears sticky and concerns about the economy remain.”
As investors navigate this high-rate environment “while simultaneously preparing for rate cuts, they are turning to a variety of sources for insight and guidance on investing.”
Amongst all investors, Google (33%) was “the most used source for information, followed by financial influencers (30%), the media (28%) and personal recommendations (25%).”
Bret Kenwell adds:
“The shift from traditional sources of information for investing such as financial education classes and materials to financial influencers, online forums and social media illustrates how the role of community in financial education has evolved across generations. Community plays a big role with investors turning to sources that offer relatable, accessible and relevant information when making decisions about their portfolios.”