Interest rate cuts can affect markets in unexpected ways. To keep my portfolio stable, I’m considering the best shares to buy to prepare for volatility

After the US cut interest rates by 50bps last week, all eyes are on the Bank of England (BoE). In August, it made the first rate cut of the year, at 25bps. Brokers and financial institutions expect at least one more rate cut this November, taking it down to 4.75%, with four more cuts down to 3.75% throughout 2025. 

The US’s leading tech index, the Nasdaq, is up 1.8% since the Fed’s big cut last week. By comparison, the FTSE All-Share is down 0.6% since the BoE cut on 1 August. So does the UK index need that extra 0.25 percentage drop before a recovery kicks in – or could another rate cut cause further declines?

To prepare for either scenario, I’m considering the following two shares.

A defensive dividend stock

Certain stocks tend to weather the storms of volatility better than others. When rocky markets send other stocks plummeting, defensive shares ride the wave. Utilities and healthcare stocks are common examples as they maintain steady demand and aren’t cyclical.

With a steady share price and reliable dividend, Severn Trent (LSE: SVT) is a good example. The water and waste company has a 4.5% yield and has paid dividends consistently for several decades. But it has very little growth potential, with a price-to-earnings (P/E) ratio of 56.4. If earnings don’t improve, the shares could suffer losses in the short term.

The company was fined £2m recently for failing to stop sewage spilling into the river Trent. As a result, it now carries £8.15bn in debt, which could threaten dividends if the company can’t find a way to cut costs and boost earnings.

Growth has been steady with only mild spikes and dips, but it’s slow. The shares are up 225% in the past 30 years, which is only 4% per year on average. Not exactly exciting returns. But with constant demand for utilities, revenue is consistent and volatility is minimal. To keep my portfolio stable, I plan to buy the shares this week.

Bring on the holidays

Stability is one thing but if the market rallies, I don’t want to miss out entirely. Mid-cap stocks tend to have more growth potential and one that looks good right now is Card Factory (LSE: CARD). Major broker UBS put a Buy rating on the stock last week with a target of 180p, a 25% increase from the current price.

The online card and gift company suffered significant losses soon after going public in 2014, falling 92% in five years. Not a great start. But things have improved since mid-2020, with the price up almost 400% since its all-time low. And with the festive season looming, online card and gift sales should see a big increase.

It’s trading at 47% below fair value based on future cash flow estimates, with earnings forecast to grow 6% per year. It lacks the growth potential of its closest competitor, Moonpig, but makes up for it with a 3.2% dividend yield. As such, I plan to buy the shares next month.