Interest Rates, Presidential Policy, and Market Impacts

SG Wealth Managers · Article Two Interest Rates, Presidential Policy, and Market Impacts

Interest Rates, Presidential Policy, and Market Impacts

Interest Rates are some of today’s hottest headlines, or so it seems, on everything from financial outlets to social media platforms. This article represents the second in a series of special educational articles provided by SG Wealth Managers, in advance of the 2025 presidential inaugural address. For a long time now, President Trump has been clearly expressing his intention for lower interest rates, with Chairman Jerome Powell acting very prudent—not jumping one way or the other too rapidly. We will see how changes in interest rates trickle down into the economy, focusing on what that could mean for technology stocks, bonds, and how to invest in them.

Interest Rates and Their Role in the Economy

The cornerstones of economic policy are interest rates and how they move, since every rise or fall in interest rates affects borrowing costs, consumer spending, and corporate investment. In the last couple of years, the Federal Reserve has been keeping rates high in order for inflation to spiral down and economic stability to be attained. We enter 2025 with the federal funds rate at 4.48% (as of December 2024), far from the near-zero rates of recent years. President Trump’s vocal support for rate cuts has been consistent with the pro-growth agenda of trying to accelerate economic activity. However, the comments by Jerome Powell suggest otherwise—he is committed to rate maintenance as a means of keeping inflation at bay. This divergence creates some important questions for investors on the possible implications for different asset classes.

Tech Stocks and the Interest Rate Equation

Lower Rates: A Tailwind for Growth Stocks Technology stocks, for the most part, are growth stocks that are quite sensitive to interest rate movements. Lower rates cut the cost of borrowing, making it easier for technology companies to invest in innovation and growth. Lower discount rates also inflate the present value of future cash flows, making these stocks more alluring to investors.
The Fed’s Stance: Powell remains resistant to rate cuts in light of fears of inflationary pressures and overheating. This translates to tech investors needing to focus on company valuations and earnings growth—which could become more difficult with stagnant rates challenging the lofty valuations of recent years.
Sector Performance Post-Election: Since the 2024 election, tech stocks have seen mixed performance. Companies with solid balance sheets and sturdy earnings have fared better in this rate environment, while speculative growth stocks have been a drag.

The Bond Market: Navigating Uncertainty

Rate Reductions and Bond Prices: Bond prices work inversely to interest rates. If interest rates fall, as President Trump is proposing, holders of existing bonds can see their instrument prices appreciate. This dynamic is particularly applicable to longer-duration bonds, those most sensitive to a change in rates.
Income Generation: To the income-oriented investor, the current high-rate environment has given way to very attractive yields on fixed-income securities. Yield compression, a possible result of a pivot to lower rates, would require reevaluation of bond positions in the portfolio.
Risk versus Return: Diversification within fixed income remains essential. Balancing risk for an optimal return can be effectively achieved with a mix of corporate bonds, Treasuries, and high-yield investment-grade bonds.

Two of Many Possible Economic Scenarios

To start to appreciate what the interest rate debate means from the perspective of broader implications, now consider two of almost endless possibilities:

Scenario One: Rate Cuts
- Economic Impact: Lower rates could spur increased consumption and investment through consumers and business companies supporting GDP growth in the economy at large.
- Inflationary Risks: An aggressive rate reduction could restart an upward spiral in inflation that would work against the Fed’s longer-term goals.
Scenario Two: Rates Remain Stable
- Controlled Inflation: Leaving the rate steady enables the Fed to persist in its war against inflation.
- Realigning Equities: Stocks could be somewhat volatile as companies adjust to higher financing costs.
- Fixed-Income Opportunities: Stronger rates maintain excellent yields for the fixed-income investor in bonds.

Lessons for Investors:

Interest rate policy underlines the importance of a proactive, flexible investment strategy. Key considerations include:

Portfolio Diversification: A balance between equities and fixed-income investments implies marginal vulnerability during periods of continuously changing rates.
Focus on Fundamentals: Companies with high earnings growth potential, manageable debt, and competitive advantages are better positioned to weather rate changes.
Reconsider Risk Tolerance: With any change in rate policy, one must reassess his or her comfort with market volatility and reposition a portfolio in that light.
Involve Your Advisor: Ongoing discussions with a financial advisor should help you prepare for changes in market sentiment related to interest rates.

The Broader Implications of Policy Decisions

President Trump’s push for lower rates reflects his administration’s broader economic goals. Investors who want to position themselves in line with macro-events must therefore understand the entangled dialogue between fiscal and monetary policy. In our article tomorrow, another important topic will be discussed: trade policies. We will show how trade wars, tariffs, and international agreements may impact the U.S. economy and global markets.

Conclusion:

Interest rates represent one of the most significant levers in economic policy. With the new administration and Federal Reserve forging their respective paths, the need for vigilance and nimbleness from investors remains strong. At SG Wealth Managers, we’re dedicated to bringing clarity and action to help you understand the shifts as they unfold. If you have any questions regarding how interest rates affect your portfolio, or if you’d like to discuss your financial plan in detail, please don’t hesitate to reach out to your advisor. Together, we’ll ensure your strategy remains on track with your goals.

Stay tuned for tomorrow’s article on trade policies and their market implications. At SG Wealth Managers, we’re here to support you through every turn of the economic cycle.

Disclosure: This is an informational article and should not be taken as financial advice. Always contact your financial advisor to understand how these trends may affect your specific situation. SG Wealth Managers does not take any political sides, and as such, will not make any commentary that is political in nature; rather, this is strictly an economic and financial discussion. Neither the information nor any opinion expressed comprises a solicitation for the purchase or sale of any security. This content is directed exclusively for the purpose of general education.

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Written by:

Eric Gomez

I am the CEO of SG Wealth Managers, a registered investment advisory firm. One of my favorite things to do is learn something new every week, whether about investing or another subject.