The Federal Reserve announced another 25 basis point rate hike last week, bringing the federal funds rate to its highest level since 2007. But according to DoubleLine Capital Founder Jeffrey Gundlach, this should mark the end of the U.S. central bank’s hawkish stance.
“The Fed will not raise rates again,” he said in a tweet.
This is not the first time for Gundlach to predict that the Fed will pivot.
“I predict the Federal Reserve will be cutting rates substantially soon,” he said in a tweet in March. “I am wrong about 30% of the time so factor that into any decision-making.”
Nevertheless, a success rate of 70% is still pretty astounding in the investing realm. Over the years, Gundlach’s uncanny ability to predict trends and make profitable decisions in the bond market has earned him the moniker of Bond King.
If the billionaire investor is right this time, it could be good news for investors in these sectors.
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Technology
Tech stocks have been the go-to choice for growth investors. But because of their growth potential, these companies actually got punished as interest rates went up.
To give you an idea, the S&P 500 has fallen about 13% since the beginning of 2022. The tech-centric Nasdaq Composite, on the other hand, plunged by a more painful 22% during the same period.
There are several possible explanations behind the phenomena.
Increasing interest rates can lead to higher discount rates used in valuation models, causing multiples to shrink — that’s bad for all stocks. But high-growth tech stocks usually have a larger portion of their value tied to future earnings and cash flows. As the discount rate used to value these future earnings and cash flows go up, these companies’ valuations can get hit particularly hard.
At the same time, tech companies in their growth phase often rely on borrowed money for research, development and expansion. High borrowing costs as a result of rate hikes can impact the profitability and growth prospects of these companies.
Tech moguls have been calling for rate cuts. Back in November 2022, Tesla Inc. CEO Elon Musk said the Fed “needs to cut interest rates immediately” or risk “massively amplifying the probability of a severe recession.” Ark Invest’s Cathie Wood — whose funds invest heavily in the tech sector — recently said that rising interest rates have hit her company’s strategy “like an earthquake.”
If the Fed pivots as Gundlach predicts, the sector would finally breathe a sigh of relief, and tech stocks could make a comeback.
Investors can access the sector through exchange-traded funds such as the Technology Select Sector SPDR Fund XLK and the iShares U.S. Technology ETF IYW. You can also purchase shares of individual technology companies if you are willing to do thorough research and due diligence.
Real Estate
Real estate is another sector that’s sensitive to interest rates, and it’s easy to see why.
When the Fed raised interest rates aggressively to tame inflation, mortgage rates also shot up. And people found it more difficult to afford a property because of increased costs of borrowing. This dampened the demand for real estate.
Publicly traded real estate investment trusts (REITs) have long been a popular option for investors looking to tap into real estate. And their performance has been impacted by this rate hike cycle as well.
In 2022 — when the Fed announced seven rate hikes — the MSCI U.S. REIT Index tumbled 24.5%.
Rising interest rates increase REITs’ borrowing costs, reducing their profitability. At the same time, the increased competition from bonds and other interest-sensitive securities can make REITs less attractive to income investors.
If this rate hike cycle comes to an end, the real estate sector could see better days ahead.
Like most publicly-traded assets, REITs can be volatile. If you want to collect passive income from real estate but don’t want exposure to the stock market’s volatility, there are crowdfunding platforms that allow retail investors to invest directly in real estate with as little as $100 through the private market.
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