If the past year has taught investors anything, it should be that forecasting the future is futile.
Take US interest rates as the crowning example of this. At the start of the year investors were full of optimism that the hiking cycle was at an end and central banks around the world would start to rapidly unwind the rate cuts of the previous 18 months or so.
So much so, that there were between six and seven cuts expected by the end of January 2025.
Six months later, few were predicting many rate cuts at all. At the midway point of the year forecasts suggested there would be one or (perhaps) two such cuts.
Richard Champion, co-chief investment officer at Canaccord Genuity Wealth Management, said this was because there were still “uncomfortable inflation numbers” as well as “the sense the US economy was still growing very fast despite the interest rate rises we’d seen”.
Then, early August happened. Markets sold off rapidly for various reasons that have been discussed already on Trustnet. Here is one such example if you need a reminder.
This induced panic, with some economists even calling for the Federal Reserve to cut rates in an emergency meeting in August ahead of more cuts in September.
Champion said this would have been “panic-inducing” and would have implied the Fed “had some insight” that things were really worrying. If it had done so, he admitted he would have “run for the hills”.
Again, this blew over. However now experts are forecasting the same amount of rate cuts as they were at the start of the year (around six), albeit slightly later than originally forecast, with these expected to take place until June 2025.
Champion said we have “done a complete round trip” since the start of the year and that we’d “gone down a hill and back up it”.
For his part, he still thinks there are too many baked-into expectations, suggesting four rate cuts in the coming 12 months, rather than the eight or so that are predicted at the top end of estimates.
But he is aware that a lot can go wrong over the next 12 months. As such, he suggested it is more important to look at the “direction of travel” rather than make strong predictions about individual meetings or the number of cuts.
This seems logical. The direction of travel has always been that rate cuts are coming. Whether it be one, three, five, eight, 57 or however many people predict.
For those that want to invest for lower interest rates, this week Matteo Anelli wrote up four fund picks from Fidelity International investment director Tom Stevenson that centred around real assets – such as infrastructure and property – which he believes will do well.
Just don’t expect them to sail higher as the Federal Reserve (and other central banks for that matter) are unlikely to always do what the experts predict.