Investors are increasingly hopeful that the Federal Reserve will start cutting rates in 2024. But those rate cuts may not come as soon they'd hope, according to Innovator Capital Management Head of Investment Strategy and Research Tim Urbanowicz.

Urbanowitz expressed skepticism about the market pricing in multiple rate cuts starting early next year, calling it “very aggressive and quite frankly, not something that you're going to see until you start to see wages come down at a more meaningful clip."

Urbanowitz advises investors to focus on “remaining invested in the equity market," cautioning against going to cash

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Video Transcript

AKIKO FUJITA: It's kind of a good conversation to be having here on what is a traditionally a slower trading day. But how are you looking at your portfolio right now with this expectation that regardless of where the Fed moves, those rates, where they are right now, are going to remain there for at least a majority of 2024?

TIM URBANOWICZ: Yeah. It's a very important question right now. And the market seems to care about one thing and one thing only. And that is what is the direction of interest rates from here. You've seen some good inflation data here recently. It's-- it's data that has reinforced our view that you're going to continue to see the Fed on hold at the-- at the current level.

But if you look at the reaction from the equity market, I would characterize that as a bit of an overreaction here recently. We have to remember that prices are still too high. If you look at where core prices are relative to where we were in 2019, they're up 20% from those levels.

So to sit here today and see the market pricing in multiple cuts starting early next year, we think that is-- is very aggressive and quite frankly, not something that you're going to see. Until you start to see wages come down in a more meaningful clip, I don't think you can sit here and just become complacent and think that interest rates are going to come down.

The cost of the Fed cutting too early are far too great. We saw them make that mistake in 1966. We saw them make it again in 1980. And I can guarantee you that Jay Powell is not going to want to be the guy to make that same mistake in 2024. So it could be a slower clip than most people think, which means higher for longer.

RACHELLE AKUFO: So Tim, for people looking at this. They're listening to what the Fed is saying that you know, they've not even mentioned those rate cuts in those FOMC minutes. But then the market is racing ahead. You look at where the VIX is. It's looking at pre-pandemic 2020 levels when it comes to the-- the fear index here. So how should people play this? What is the strategy? What should they focus on, so that they cut through the noise and have a strategy that works for them for this period?

TIM URBANOWICZ: Yeah. Well, the focus has to be on remaining invested in the equity market. We have seen so many retail investors, so many advisors that have sold out and went to cash. That has been a big mistake if you look at the rally that we've seen here recently. We have been out there pounding the table that the time when the Fed pauses is a very profitable time to be in equities. Yes, there's headwinds, but you have to be invested.

And so one of the strategies that I think a lot of advisors have been finding value in here recently is under the umbrella of defined outcome ETFs, which is where we-- we specialize. And the ticker on this one is TJUL. This strategy is designed to provide a 100% buffer against losses on the downside while simultaneously providing upside exposure on the S&P 500 ETF to the first 16.6% over a two-year outcome period.

So the reason we're seeing such interest in this strategy right now is it really gives you an alternative to cash to still stay invested. Yes, you're helping hedge and protect on the downside. But you're not making that mistake to sell out and go to cash. If you think about what you need to get right to make the cash call, not only do you need to know when to get out, but you also have to know when to get back in. And to try to nail both of those is almost impossible.