With recent economic data showing inflation continuing to cool and jobless claims slightly higher than expected, the Federal Reserve is all but certain to cut interest rates at the end of its September meeting, for the first time since March 2020.
Investors aren’t expecting just one cut. According to the CME FedWatch tool, which tracks financial markets’ rate expectations, the median expectation is a total of two full percentage points of rate cuts by September 2025. If the rate-cutting cycle begins as expected and continues for at least the next year, there are some stocks that big winners.
The sluggish real estate market could gain momentum
One effect of rising interest rates in recent years has been rising mortgage rates. And while the average 30-year mortgage rate has cooled somewhat from its peak of around 8%, rates are still around 6.5%, more than double the level in early 2022.
As a result, the real estate market has slowed to a crawl. Existing home inventory is near generational lows, mortgage demand for both purchase and refinance is low, and as a result, real estate sales are down more than 35% since before the rate hike cycle began. In fact, mortgage rates and existing home sales volume have moved in a markedly inverse relationship.
This could be great news for the real estate industry, but what I’m most excited about is Red fin (NASDAQ: RDFN). Management has done a great job of focusing on efficiency during the slow times, and building relationships with top performing agents. It is very well positioned to take advantage of pent-up demand for homes when rates fall, and it could quickly become profitable in a more favorable environment.
Lower deposit fees could boost profits significantly
Bank Disruptor SoFi (NASDAQ: SOFI) has only been a bank since early 2022, and since then its deposit base has grown from zero to $23 billion. This is enough to fund about 90% of its loan portfolio with deposits, which are generally cheaper than borrowing money.
While a large deposit base creates a favorable cost structure, it’s important to realize that SoFi is an online bank whose savings accounts pay relatively high interest rates — up to 4.6% at the time of this writing. However, if rates fall, it will almost certainly result in a decline in SoFi’s deposit rates. Meanwhile, the loan book is largely made up of fixed interest rate personal loans and student loans, which continue to pay the same amount.
Of course, there are plenty of other reasons to like SoFi right now. But this is one way the expected declining interest rate environment could provide a tailwind.
Buy as a long term investment
While I think both will likely be big winners if rates fall, it’s important to note that there’s no way to accurately predict what the Fed will do. After all, in early 2022, it’s pretty much nobody predicted that a cycle of sharp rate hikes was about to begin. There are simply too many factors involving inflation, consumer confidence, employment and more that could play out differently than expected and cause the Fed to change course.
The point is, I believe the next few years are going to be great for these stocks, but I have them both in my own portfolio because I think they’re going to be good. long term winners, even if interest rate developments do not go as expected.
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Matt Frankel has positions in Redfin and SoFi Technologies. The Motley Fool has positions in and recommends Redfin. The Motley Fool recommends the following options: short August 2024 $11 calls on Redfin. The Motley Fool has a disclosure policy.
Prediction: When the Federal Reserve Cuts Rates, These 2 Stocks Will Be Huge Winners was originally published by The Motley Fool
