5 Investments to Beat Cash When the Fed Cuts Rates

The Fed is getting ready to cut interest rates. For investors, who've been keeping record amounts of money on the sidelines, it's time to consider putting that cash to work.

After months of wait-and-see uncertainty, Federal Reserve chairman Jerome Powellappeared to signal a September interest rate cut was imminent at the Fed's Jackson Hole meeting last week.

---

---

Plenty of investors don't seem to have gotten the memo. Assets in cash-like money-market funds stand at more than $6.24 trillion—a record high, according to the Investment Company Institute.

It isn't hard to see why investors love money-market funds. They offer little risk and good yields. But with Wall Street expecting no fewer than eight rate cuts in the coming year, those payouts' days are numbered. That means it's time to venture into stocks, bonds and other assets—or risk losing out.

Here are five places to consider putting your cash.

Defensive stocks

One reason investors could be slow to move money out of cash. The stock market doesn't look all that appealing right now. Stock prices—and valuations—are near record highs. And, while most economists are optimistic the Fed can stick a so-called soft landing by bringing down inflation without tipping the economy into a recession, even a small misstep could cause panic. Just look at what happened in early August, when weak jobs numbers combined with trouble in Japanese markets to send stock prices reeling.

One solution is to focus on defensive stocks—those that hold up relatively well even when the economy doesn't. Both utilities and consumer staples are classic defensive sectors.

While cyclical, real estate stocks also stand to benefit from lower interest rates, which could give a boost to property values.

Despite recent price gains, utilities and staples stocks still look attractive. And both sectors still trade at price-to-earnings ratios well below the market's.

Dividend Stocks

If you are planning to move cash into the stock market, dividend stocks provide another convenient option. There's plenty of overlap with defensive stocks; targeting dividends will let you hang on to at least some of the yield cash instruments currently offer.

If you want to maximize your potential total return, it may make sense to focus on companies with long-track records of both paying and raising dividends.

Bonds and Bond Funds

You don't have to bet on stocks to earn extra returns. Simply moving your savings from money-market funds, which target short-term debt maturing in a year or less, into bonds with longer durations can help protect you from rate cuts.

An inverted yield curve means longer-dated bonds offer slightly lower interest rates than money-market funds and other short-term instruments. But the curve has recently been steepening. More important for investors: Longer-dated bonds allow you to lock in today's yields for years to come and to benefit from rising bond prices if and when the Fed finally starts cutting rates. Bond prices move in the opposite direction to rates.

Gold

Like bonds, gold is a way to diversify your portfolio and protect yourself against bear markets. Gold doesn't throw off interest like bonds do; therefore when bond yields fall, gold becomes comparatively more attractive.

It's no surprise then that gold has rallied this year. Gold recently traded at $2,549 an ounce, close to its record high.

While a gain that size should give investors pause, there's reason to think gold still has room to run. For one, gold tends to rally during times of politician uncertainty. With wars in Ukraine and the Middle East, as well as a neck-and-neck U.S. election, there is certain to be plenty more of that.

Buying by central banks is another tailwind. The Central Bank of China in particular has been pouring money into gold in an effort to diversify it holdings away from the dollar, which could ultimately weaken if inflation ticks back up. "Solicitous rate cuts risk more '25 inflation; do what central banks are doing…buy gold," wrote Bank of America analysts in a recent note.

CDs

While cash-like investments may become less attractive once the Fed starts cutting rates, they will still play a role in investors' portfolios. Financial advisors recommend most savers keep six months's worth of expenses in cash, and for retirees it's even more.

What to do with cash you don't want to invest? One option is to simply eat lower yields. Assuming inflation continues declining toward the Fed's 2% target, even diminished money-market yields will allow investors to grow their savings after inflation.

If you don't expect to need your money right way, you can also lock in today's rates with a CD.

Write to Ian Salisbury at ian.salisbury@barrons.com