There is no doubt that the expected interest rate cuts by the Federal Reserve in 2024 could provide much needed relief to U.S. businesses and corporations, but there are some sectors where these cuts could have a particularly powerful impact.
Industries such as real estate, solar, gold miners, and small-cap companies in the Russell 2000 have experienced a remarkable rally immediately following the Federal Reserve’s meeting and Powell’s press conference.
The Real Estate Select Sector (NYSE:XLRE) has seen a 6% surge since the Fed’s rate decision. The iShares Russell 2000 ETF (NYSE:IWM) has risen by 6.9%. The VanEck Gold Miners ETF (NYSE:GDX) has soared by an impressive 8.8%. The Invesco Solar ETF (NYSE:TAN) has skyrocketed by an astonishing 17%.
The Real Estate’s Rebound
Lower interest rates have a profound impact on the real estate market. When interest rates drop, the cost of borrowing money to purchase or refinance real estate properties decreases.
This reduction in borrowing costs makes mortgages and loans more affordable for both homebuyers and real estate investors. Consequently, it leads to increased demand for real estate, driving up property prices and rental rates. This surge in demand, in turn, boosts the income and valuations of real estate companies.
Despite a 40% drawdown from their January 2022 highs to the lows of 2023, real estate stocks have rallied by 26%. However, they still have room to grow, remaining 30% below their all-time highs.
Why Small Caps Thrive Under Lower Interest Rates
Small-cap companies within the Russell 2000 are also riding the wave of expectations for lower interest rates.
These smaller enterprises are more reliant on traditional bank financing than their larger counterparts, making them sensitive to interest rate fluctuations.
Investors may also view small-cap stocks as riskier investments compared to larger ones, so when interest rates fall, there is often a greater appetite for taking on risk.
The drawdown of small-cap stocks was substantial, with a 34% decline from their late 2021 highs to the October 2023 lows.
Since that bottom, they have surged by 23%, and a further 23% rally is needed to reach their all-time highs.
Solar Industry’s Sunny Days
The Invesco Solar ETF has seen a spectacular 17% increase following the Federal Reserve’s decisions. This sector is particularly sensitive to interest rates for several reasons.
Solar companies often require significant capital investments for building solar farms and infrastructure.
Additionally, the value of their future cash flows from solar projects is influenced by the discount rate used to calculate their present value. Lower interest rates translate into a lower discount rate, resulting in a higher present value of these companies’ future cash flows.
Solar stocks faced a steep 60% decline from their November 2021 highs to the November 2023 lows. Since then, they’ve experienced a 25% rally, but there’s still a long way to go, with a 100% increase required to revisit their all-time highs.
Golden Opportunities In Mining Stocks
The VanEck Gold Miners ETF has soared by an impressive 8.8% in response to lower interest rates.
Gold mining operations require substantial capital investment for exploration, development, and production. When interest rates are low, the cost of borrowing money to fund these activities decreases, bolstering the profitability of gold miners.
Gold mining stocks also enjoy the tailwind of higher gold prices, given the inverse relationship of the precious metal with interest rates and the U.S. dollar. As interest rates fall, gold prices often rise, making this sector an attractive option for investors in a lower interest-rate environment.
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