The 2 ½ year rate-hiking cycle is over.  I’m amazed at how well the stock market did considering that short-term rates went from zero to over five percent.  Now the Fed is expected to cut rates several times.  The interest rate on money market funds is dropping below five percent and could be just under 4 ½ percent by year’s end.

I’ve written several times that investors should buy income vehicles before yields drop.  They have been.  Over the past five months T-bond ETFs are up 13 percent excluding interest payments!  Successful investors anticipate the news instead of waiting for it.

Acting on forecasts instead of past data is also important for Federal Reserve officials.  The Fed can’t be data dependent based on historical data.  We’ll leave that to the financial media.  Instead, they must be data dependent based on their forecasts.  Currently, inflation is falling faster than what the Fed predicted and unemployment is higher than their forecast.  That’s why most economists expect more rate cuts.  It also makes an argument that the Fed has waited too long to cut.

Lower rates will push our income vehicles ever higher, but slowly lower money-market fund yields.  A year from now the money-market funds will yield at most 4 percent, which was a level we found attractive when rates were rising, but it won’t feel as good when rates are falling.  Go figure.

As for the overall market, September has historically been the year’s worst month and it was off to a weak start again amid a spreading belief that the economy is slowing.  Given the nature of today’s risks here and overseas, and our politics, this September could be rougher than usual.  Whatever the case long-term investors in quality stocks with dividend growth will come through just fine.  For example:

The Vanguard Dividend Growth ETF (VIG) is up 15 percent this year and the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) is up 10 percent.  The Invesco S&P 500 Low Volatility ETF (SPLV), which is heavily weighted towards Financials and Consumer Staples, is up 14 percent year-to-date.  That’s not too far behind the tech-heavy Nasdaq 100’s 18 percent return but with less volatility.

Bottom line:  Prospects for growth next year are still good and together with falling rates will create a favorable market environment helped in part by the impact of AI on businesses and individuals.  A recession or even a slowdown would change that (the election probably won’t).  Just when and by how much remain to be seen.

David Vomund is an Incline Village-based Independent Investment Advisor.  Information is found at www.VomundInvestments.com or by calling 775-832-8555.  Clients hold the positions mentioned in this article.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security.