Market has been 'overshooting' Fed cuts 'pretty substantially'

US stocks (^DJI,^GSPC, ^IXIC) rallied after the Federal Reserve kicked off its rate-cutting cycle. Envestnet Solutions co-CIO and group president Dana D’Auria joins Morning Brief to discuss what the Fed's next moves may look like and how investors can best position their portfolios.

While inflation continues to cool, all eyes have turned to the state of the labor market. D’Auria stresses the importance of the upcoming September jobs data, explaining that employment data will be the "single biggest factor" weighed by the Fed ahead of its next interest rate decision.

Looking toward the year-end, D’Auria expects market volatility ahead: "September is notoriously volatile. October is certainly volatile. We're very close to this election, very partisan election, as we all know, and a lot of uncertainty's coming into the markets over that." However, she notes that this volatility shouldn't bode poorly for long-term investors.

She also argues that the market has been "overshooting on expectations of the Fed pretty substantially and pretty regularly." She notes that the Fed's 50-basis-point cut in September gave markets what they were hoping for. Now, some investors are pricing in another 50-basis-point cut in November, which D’Auria says is "overshooting." She argues, "I wouldn't expect more than another 25-25 this year."

As all eyes have turned to September's jobs report, D’Auria tells Yahoo Finance, "Of course the market wants to see that the employment picture is holding up to a certain extent. But you know... there's always this bad news is good news hovering over us as it relates to rate cuts. And if there are more cracks in the job market than the Fed would have expected... that could be ironically interpreted well, because maybe the Fed lowers rates a little bit faster."

With that sentiment in mind, D’Auria encourages investors to avoid sitting in cash markets. She explains, "Trillions and trillions of dollars have flooded into money markets. And of course, that's because we finally have some return coming from cash. So it's understandable... The market has just delivered and delivered and it really does speak to not trying to time these things and pull out of the market and go to cash."

She adds, "But if you're worried about recession... you can certainly increase your fixed income allocation. You can, within your equities, lean toward more defensive places like quality and low volatility."

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Melanie Riehl