Turning point of falling interest rates: How to manage your portfolio to survive
We're now entering the final quarter of this year, a crucial time for the stock market, as listed companies begin to release their third-quarter financial statements. Global stock markets have been surging, having been sensing the downward trend in interest rates since mid-year. The US has been hitting all-time highs, China is also beginning to recover from its slump, and Japan, Europe, and Germany are all setting new records. The Thai stock market, meanwhile, has seen the SET Index rebound from 1,000 points to 1,300. Who would have thought that Thai stocks would rally this year, gaining over 20%?
It's all because the stock market loves clarity. After the Trump tax bill, the Reciprocal Tariff, was finalized, the US began cutting interest rates last September. This downward interest rate cycle marked a "major turning point" in financial markets. Money began flowing out of safe assets, namely the bond market, where approximately US$7 trillion was parked, and into riskier assets in search of higher returns. It's no surprise then that US stocks are currently making all-time highs.
This year, we must admit, is a year in which the global market is brighter than expected, as we will see both stocks and gold rising together. Gold likes uncertainty. When the 'US shutdown' occurred from October 1, 2568, it pushed the price of gold up, breaking through the mercury, surpassing 4,000 US dollars/ounce, a historical high. The US stock market reflected the news of the downturn by adjusting down less severely after the previous new high.
While the "downward trend in interest rates" is approaching late in the year, the market currently expects the US Federal Reserve (Fed) to cut its policy interest rate two or three more times throughout the remainder of this year and into early next year, when it is expected to reach a range of 3.25%-3.50%. However, this depends on actual economic data and inflation, which the Fed currently views as high and will see the full impact of Trump's tariffs next year. If US inflation continues to exceed its 2% target, the Fed may shift its monetary policy to an accommodative approach for the time being. The WTO expects global trade growth to be only 0.5%, down from the previous forecast of 1.8%.
Therefore, from now until next year, the world remains highly uncertain. I'd like to invite you all to take a portfolio health check to prepare for the turbulent global investment market. I believe many are beginning to doubt whether their "diversified" portfolios are still viable, or whether they need to adjust their asset allocations, increasing or decreasing them, to ensure their portfolios can continue to grow as planned.
How scary would it be if the US shutdown were to continue?
First, let me illustrate just how terrifying a government shutdown can be.
A US government shutdown is a situation in which the US federal government is unable to operate normally because a budget bill has not been approved by Congress. The main reason for this is political conflict between the 'Republican' and 'Democrat' parties over spending priorities.
This year, the United States entered another government shutdown after Congress failed to reach a budget agreement in time. This is the first government shutdown since 2018-2019. The picture that emerged is that many government agencies were temporarily closed. Hundreds of thousands of civil servants were immediately furloughed without pay. Meanwhile, agencies providing services necessary for security and safety, or "essential missions," continued to work but would not receive pay until a new budget was approved. This reflects the political picture that will be heating up in the United States.
Looking back at historical statistics, since 2519, the US has faced nearly 20 shutdowns, the longest of which lasted 34 days (in late 2561) under the Donald Trump administration.
Therefore, this “US shutdown” is not a new issue for investors and the public, but every time it happens, it creates psychological shocks in the market.
The issue that the world is worried about is whether the prolonged situation will affect the credibility of the United States. This will certainly affect financial and debt markets. Fitch has stated that in the short term, the US credit rating is unlikely to be immediately changed. What remains to be seen is whether President Trump will be able to negotiate a resolution to this shutdown situation quickly or slowly, and what the outcome will be.
The market has estimated that if the shutdown drags on, it could cost the US economy billions of dollars per week. Looking at the statistics from 2561, the longest shutdown was 34 days. For this round, economists estimate that if the shutdown lasts for a quarter, US GDP could shrink by around 0.2-0.6%.
In cases where the US shutdown lasts only a few weeks, the impact is often offset in the following months by backdated payments to workers. This phenomenon is called pent-up demand, where spending is pent-up and explodes after a crisis. However, in 2561, the S&P 500 was down about -7% before the shutdown began, but gained more than 10% in a single month after it eased. The reason is that core businesses didn't actually shut down; the economy kept moving, and government money was immediately pumped back into the system once a new deal was passed.
But the risk this time around is that the US debt situation is larger than 3.6 trillion dollars, a debt that has been accumulating for decades.
And the more the Trump administration can enact the "One Big Beautiful Bill," which could implement a variety of measures, including corporate tax cuts, increasing the child tax credit, adjusting welfare criteria, and raising the public debt ceiling by $5 trillion, the more the US risks of public debt over the long term.
This round of the "US shutdown" has led to stronger warning signals from around the world, emphasizing that the US may be at a dangerous turning point. Recently, "Ray Dalio," investor and founder of Bridgewater Associates, stated that the US is standing on the brink of an "economic heart attack" due to the problem of large debt.
He pointed to major factors that could push the US economy to the brink of collapse. The first is government overspending, which has strained the system. The US government is spending 40% more than it receives. This chronic deficit has led to the accumulation of debt and escalating interest expenses for decades. The second is a severe imbalance in the bond market, between the amount of debt the government "must sell" and the limited demand from "buyers." This occurred mid-year when the government failed to sell all of its bonds and had to raise interest rates to attract investors. It is estimated that in the coming years, the US government will need to raise funds through bond sales of a massive $12 trillion.
These two major issues are the reasons why Dalio concludes that an economic heart attack may not be far from reality, so we must continue to monitor this situation.
Bond market twitches, US stocks less volatile thanks to AI support and falling interest rates
Let's take a look at the impact on the financial markets after the "US shutdown" and find that in the short term, the US bond market has not experienced severe volatility. In early October, US government bonds experienced some selling pressure, causing yields to rise in the short and medium term (causing bond prices to fall), reflecting investors shifting to other assets that they see as having the potential for higher returns.
Meanwhile, the yield on the 10-year Treasury note is hovering around 4.10-4.20%, with some small spikes to 4.16%. Spreads in the Credit Default Swaps (CDS) market for US government debt are trending slightly higher, signaling market concerns about the government's risk profile despite its high credit rating.
Furthermore, investors anticipate uncertainty regarding fiscal policy and new debt issuance, leading to a slowdown in bond purchases. This, coupled with external factors such as political uncertainty in France and the resignation of the Prime Minister, is impacting confidence in global bond markets, including the United States. Therefore, it is important to consider whether your bond portfolio is adequately diversified globally.
The US stock market has seen some retracement, with the S&P 500 slightly down from its previous high. The S&P 500 and Nasdaq have been hitting all-time highs for six months straight, fueled by expectations of lower interest rates and AI technology stocks, leading to several stocks continuing to reach new highs today.
Investors are still wondering if the US stock bubble will burst or if it will continue to grow.
I'd like to share the perspective of Amazon founder Jeff Bezos, who sees the artificial intelligence (AI) industry as being in an "industrial bubble," but emphasizes that the technology is real and will eventually transform every industry.
While we see over-investment behavior today, that doesn't mean AI is an illusion. On the contrary, he believes AI will become a "real" technology and will bring significant benefits to society in the future.
“Bezos” described a bubble as a period when prices break out of fundamentals or when a business’s valuation “does not align with the fundamentals,” and there is currently a lot of excitement around AI, similar to the dotcom bubble of 2000 that ended with the collapse of many companies.
While the investment frenzy may see many companies fail, Bezos believes the "winners" who survive will create hugely valuable innovations, and that society will ultimately reap significant benefits from AI technology.
Goldman Sachs warns that the stock market amid the AI trend could face a "reset" and "correction" depending on how long the uptrend lasts.
Personally, I see the "Economic Era Shift" as AI, Data Centers, Semiconductors, and Cloud becoming the new infrastructure of almost every global economy. This may be the answer to the question: AI is not yet a serious economic bubble. Because "not investing in technology" may mean "not being in the game of the future" anymore.
The era when "technology stocks" dominated the capital market was a major turning point for the global economy. It's been decades since then, and there's never been a time when the influence of "technology stocks" has been greater than the present. Recently, the share of technology stocks and related businesses in the US stock market has surged to 56% of the total market value, a record high and higher than the 51% during the dotcom bubble of 2000.
Meanwhile, defensive stocks such as energy, utilities, and consumer staples saw their share drop to a historic low of 16%, clearly demonstrating a shift in capital flows towards technology.
“Is AI a bubble…or the beginning of a historical shift in economics?” This could signal a crucial crossroads for investors, who must choose whether to fear a bubble or see the “opportunity” to become a driving force in the future of the world.
Portfolio Management Strategy – Rebalancing Portfolio to Escape from the Hot Market
The world-renowned investor Warren Buffett once said, “Don't speculate on the market because no one knows what will happen in advance.” He also advised building a strong ship (portfolio) to withstand the storms that come.
And believe it or not, in the midst of a hot market, Grandpa Buffett still holds over 50% of his portfolio in cash and bonds, waiting for an opportunity to buy good stocks at low prices. There was news recently that he chose to buy UNH stocks to put in his portfolio and sold overpriced stocks, such as BYD, to realize profits. This is Rebalancing.
Rebalancing involves adjusting the weight of your portfolio's assets to reflect the current situation at a given time, based on the principle of diversification. A good investor must regularly check the health of their portfolio. Whenever the price of their investments—whether stocks, gold, bonds, or debentures—changes in a particular country, they should also monitor whether they can continue to meet their long-term investment goals. If any assets are making excessive profits, they can be sold to rebalance their holdings.
Conversely, if an asset's price falls sharply due to significant changes in fundamentals, it's necessary to sell it to preserve the remaining funds and reinvest the money in quality assets, such as stocks whose businesses are still growing and have the potential to generate income and profits over the next 3-5 years. Bonds or debentures held as investments still have good credit ratings or have their reliability changed. This requires careful assessment of the appropriate level of risk and return.
I still adhere to the investment principles of Grandpa Buffett, who is an idol of the VI community, which Jitta Wealth uses in managing investment portfolios for clients. What we always emphasize is that long-term investment principles should not be shaken by short-term news. We must 'Stay the Course' or 'be steadfast according to the plan', focusing on things that we can actually control, which are mainly:
- Continue DCA. Gradually invest (DCA) according to the cycle. Reduce the risk of mis-timing.
- Diversify your risk by creating a Core & Satellite portfolio, which is a simple investment portfolio formula with a proportion of 80% and 20% respectively.
The core portfolio is the backbone for generating consistent, if not high, returns. It's invested globally, including high-quality bonds and debt instruments from the United States. Stocks include US stocks, developed country stocks, and large emerging market stocks like China. If you're my client, I recommend investing in Global ETFs that diversify your investments around the world using this formula.
Additional portfolios (Satellite) will focus on generating high returns, possibly involving some speculation at a much higher risk level. Investments can focus on stocks in specific industries or countries experiencing rapid growth, such as Vietnam, India, or perhaps gold, whose price is currently skyrocketing, to increase profit opportunities but limit losses, as losses will not significantly impact the overall portfolio.
Therefore, you should adhere to sound investment principles, maintain investment discipline, have a sound strategy, diversify your risk, and proceed steadily according to your plan, even though the current US shutdown news is full of drama. At the same time, you should grasp the right investment direction as the world approaches a turning point with falling interest rates and the trend of AI driving the future. Therefore, in the long term, the market will continue to be driven by business profits and economic growth. This is what separates successful investors from the average person, not the most accurate news predictions.
All this allows investors to 'confidently invest' without worrying about temporary news, such as the US shutdown or political news that may affect their investment journey.
'Continuous investment with good strategies and mindset' That will help you get through every crisis. I wish you all good luck.
Let me reiterate that the most important factor for successful long-term investing is 'continuous investment with a sound strategy and mindset' that will help you navigate through any crisis. I wish you all the best.
