Prior to the advent of navigational charts in the 19th century, sailors often looked to the North Star, or Polaris, as their key reference point. Once Polaris was spotted, sailors could gauge the distance from their destination and adjust accordingly.
Similarly, many investment professionals currently have their gaze fixed on the Federal Reserve to gauge the direction of the market in 2025. In fact, 72% of institutional investors say central bank policy will influence their investment decisions this year, according to the 2025 Natixis Institutional Outlook Survey.
[Sign up for stock news with our Invested newsletter.]
Schroders’ 2024 Global Investor Insights Survey, which included 216 institutional investors from North America, revealed central bank policy (75%) and high interest rates (71%) were among their top concerns in the coming 12 months.
Following three rate cuts in late 2024, the Federal Reserve decided to pump the brakes and keep rates steady at 4.25% to 4.5% at its last Federal Open Market Committee meeting in January. Fed Chair Jerome Powell reaffirmed a wait-and-see approach during his testimony before Congress in February: “With our policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance. We know that reducing policy restraint too fast or too much could hinder progress on inflation.”
Still, Steve Dean, Compound Planning’s chief investment officer, points to the Fed’s own outlook, which reflects “two more 25-basis-point rate cuts this year, so an ending fed funds range of 3.75% to 4%.” As of the morning of Feb. 27, CME FedWatch’s probability gauge also favors two 25-basis-point rate cuts this year, giving that scenario a 33.4% chance. Rate traders are conveying only a 5.5% probability of a hard pause at a target rate range of 4.25% to 4.5% through the end of this year.
Julia Hermann, global market strategist at New York Life Investments, adds, “This sharp hawkish shift in interest rate expectations is due to above-trend economic growth, very gradual disinflation progress, as well as greater policy uncertainty.” For keen investors who are eager to look past the Fed’s recent pause, though, there may be some opportunities to advance the ball forward this year. As the late 10-time national championship basketball coach John Wooden once quipped, “When opportunity comes, it’s too late to prepare.” Some leading investment professionals weigh in on five opportunities investors may want to consider in advance of any central-bank policy adjustments this year:
European Stocks
Dean reflects on recent rate cuts and accommodative fiscal policy in Europe: “European stocks are priced for worst-case scenarios rather than perfection, and even an expectation of a modest rebound in growth in those economies could lead to rebound in equity market performance. That would indeed be a shift from the past several years, where U.S. equities have far outpaced international stocks, providing some of the diversification benefits from holding international stocks that has been missing more recently.”
Financial Stocks and Health Care Stocks
Victoria Fernandez, chief market strategist at Crossmark Global Investments, agrees there are opportunities in equities outside of the U.S., but specifically highlights the global financial and health care sectors among her top choices now. She suggests, “Trim some of your winners and be ready to start or add to positions in sectors/names where they are in an uptrend but have made some consolidations, giving you a nice entry point. With financials having taken a small breather, you could add there, and health care has seen some early signs of momentum as well. Look for the names with strong balance sheets sporting consistent cash flows and earnings.”
High-Yield Corporate Bonds and Municipal Bonds
Hermann is not concerned about the prospect of credit-quality issues, which supports her current conviction in high-yield corporate bonds. Hermann also suggests adding duration among municipal bonds. She comments, “We have estimated that amid current policy uncertainty, the range for the 10-year Treasury yield could reach 5%. This means that even with the 10-year sitting comfortably above 4.4% since December, we have recommended that investors consider adding duration only tactically in Treasurys. Our longer-duration bet is, and has been, in the upward-sloping portions of municipal bond curves.”
Scott Helfstein, head of investment strategy at Global X, also sees a duration opportunity among fixed-income investments and adds, “We think that fixed income in the middle and long end of the curve could be appealing, but expect volatility in rates as the Fed weighs inflation alongside tariffs.”
Takeaway
It’s too early to tell how the Fed will manage key policy issues, like stubborn inflation and any unforeseen slowdown in the labor market, this year. What’s clear now, however, is that portfolio diversification is still a north-star strategy for investors who aim for long-term, desirable outcomes, like a robust financial plan and the ability to retire with confidence.
More from U.S. News
How to Invest During Rate Cuts
Bonds and Rates: Will Bonds Revive as Rates Fall?
5 Ways AI Will Take Crypto Mainstream
Best Investments for the Pause in Fed Rate Cuts originally appeared on usnews.com
