Is the bond rally over? How to position for interest rate cuts

As the Federal Reserve gears up for its first interest rate cut at its September meeting, Wells Fargo Investment Institute senior global market strategist Scott Wren joins Morning Brief to discuss how investors can best position their portfolios for easing rates.

Wren believes that the bond rally will likely come to an end, and encourages investors to take profits from bonds and move into stocks. "We use short-term fixed income as a parking spot. We had been overweight long-term bonds. But you know, we've seen a good rally. So we would take money from bonds, both short-term and long-term, and we would move that into the S&P 500 (^GSPC)," he explains.

He also encourages being neutral weight on the Russell 2000 (^RUT), as small caps stand to benefit from an interest rate cut. Wren notes that he still prefers large caps over small caps, and points to sectors like energy and communication services as attractive areas.

"We've taken a step toward moving out of bonds after this big rally. We've tried to take advantage of lower stock prices and to buy some equities here because certainly, you know, we think the S&P is going to be near 6000 at the end of next year. We want to take advantage of any pullbacks. We don't think interest rates are going to go lower," he concludes.

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This post was written by Melanie Riehl

Video Transcript

Scott just wanna get, uh, finally here, actionable with some of the investors out there looking through this data point trying to game out what the feds pathway might look like and anticipate their actions.

What is the the top trade or portfolio positioning that they should be thinking about after a data point like this And going into that next meeting, Well, I think this bond rally that we've seen, uh, in the long term, Uh, a long term 10 year treasury.

Uh, you know, these rates are low.

We don't think they're going to go much lower.

So what we've been recommending that our clients do really over the course of the last six weeks or so is to take money from bonds and move it into stocks.

So some people we use short term fixed income as a parking spot.

We had been overweight long term bonds, but, you know, we've seen a good rally, so we would take money from bonds both short term and long term, and we would move that into the S and P 500.

If you're underweight, small cap Russell 2000 stocks, we'd bring that up to a neutral weight which is what we did.

We still prefer large over small.

And then if you're looking at sectors, industrials, materials, you know, energy looks attractive here.

We don't think oil is going to trade much lower than where it is now.

Communication services which, of course, you know, has a couple of members of the of the mag seven in it.

That looks pretty attractive here.

So I think there's some movement that you can do in your portfolios.

But we've taken a step toward moving out of bonds after this big rally.

Um, we've tried to take advantage of lower stock prices and and to to buy some equities here because certainly, you know, we think the S and P is going to be near 6000 at the end of next year.

We want to take advantage of any Pullbacks.

We don't think interest rates are going to go lower.

All right, Scott Brown always great, uh, to get your insight here, especially on a day like today.

Thanks so much for taking the time to join us here.

Senior global market strategist at Wells Fargo Investment Institute.

Thanks so much, Scott.

Have a great day, guys.

You too,