Buy These 3 Sectors to Profit When Rates Fall

Colin’s note: Today, I’m continuing my mission to help folks bid farewell to 2023… And prepare for 2024…

In Monday’s video, we looked at what you can expect next year regarding interest rates and how a rate-cutting cycle will impact markets.

And today, I’m sharing with you three sectors that have struggled this year that I believe will thrive when the Fed starts cutting rates… which I expect we’ll see sometime next spring.

It’s all in today’s video… Or, if you prefer, you can read the transcript below that we’ve edited for flow.

Hello everyone, Colin Tedards here. This week, I’ve been starting to set the stage as we prepare to leave 2023 behind… and helping folks strategize for 2024.

On Monday, we looked at what to expect regarding interest rates next year – the start of a Fed rate-cutting cycle… a potential crash… and plenty of volatility.

One thing I like to do at this time of the year is identify some sectors that didn’t do so well during the year… But are probably set for a rebound in the next.

And I’m confident the three sectors I’m going to talk to you about today are set for a breakout year in 2024.

Now obviously no one knows what’s going to happen next year… But I am confident the Federal Reserve is done hiking interest rates. We should see a reversal by the spring of next year.

That’s my macro thesis on interest rates. And until I see data that proves otherwise, it’s the direction I believe things are heading.

Yesterday we got a view of inflation from the Fed that didn’t change my expectations heading into next year. Currently, the market’s expectation is for several rate cuts beginning in May.

So let’s look at the struggling sectors I think should be on your radar when the Fed starts cutting rates…

First up, one sector that has struggled this year but would benefit from rates dropping? Dividend stocks.

Think about it. Investors who have had to rely on income were forced into dividend-paying stocks as the Federal Reserve kept rates near zero for as long as they did.

Now with money market funds paying 4% to 5%, it has made far less sense to buy into a dividend stock or fund that’s going to return less.

We can see that in the performance of the popular Schwab Dividend Equity ETF (SCHD) underperforming the broader markets. It’s down about 5% over the past year.

Depending on how much interest rates fall in 2024, dividend stocks could be set for strong inflows of funds next year.

So dividend stocks are a pretty safe bet for 2024. Even if rates stay the same or rise a tiny amount, they should give you a decent return.

This next pick is more for investors who want to take some real risk.

That’s because this sector has been decimated by higher rates and investors fleeing to the safety of mega-cap technology and money market funds.

And that sector is the solar industry. 

This sector has had a rough go in 2023… It’s responsible for the two worst-performing stocks in the S&P 500 over the past year – Enphase Energy and SolarEdge.

Higher interest rates have slaughtered the solar industry. Installs are often financed. And in the near-0%-interest days, the solar industry soared.

That’s where things get exciting. If you get a meaningful reduction in interest rates, the solar industry is set to benefit.

In my opinion, the solar industry is a pretty risky bet… only because rates would need to see a meaningful reduction and there’s political risk.

But the risk-reward setup is one of the largest I see in the market today.

And lastly, for those looking for high upside with a fairly simple way to play it… this next pick is for you.

It’s a sector I’ve written quite a bit about… And that’s small-cap stocks.

With rising interest rates, investors had no patience for the no-profit, hope-and-dream type of companies.

I made a call on small-cap stocks back in September when – based on technical analysis – the Russell 2000 index was starting to flash buy signals.

I believe small-cap stocks will continue to rally into 2024 as the excitement of earning 4% in a money market fund pales in comparison to what the small-cap index can make in a good year.

Now, I admit I was a bit early on my small-caps call… But the Russell 2000 has rallied more than 11% in the past month.

That’s because the best investors are always looking ahead… making an educated assumption on the macro environment… and applying that to sectors that will benefit.

And if you take anything away from this video it’s that you shouldn’t wait for Jerome Powell to signal all clear on the economy. By then, some of the biggest gains will be over.

The same thing is true if you think the economy will fall apart in 2024.

No matter which direction you think things are heading, the time to position yourself is now.

Let me know what you think about the direction of the economy. You can write us at feedback@brownstoneresearch.com. I’m always open to hearing what everyone thinks.

I’ll be back later this week. My name is Colin Tedards, that was today’s issue of The Bleeding Edge. I hope you have a great day.