When Fed Cuts Rates: Who Wins? Buy Them Now
US stock indexes closed higher on Tue, 07 May 2024.
Their 5th session of advances, as investors continued to gain hope that there was a greater chance of the Fed cutting interest rates this year.
Expectations for rate cuts by US central bank have been tempered as the year has progressed, as inflation has proven stickier.
Some investors had even begun to worry they might not materialize at all, sending markets lower in April 2024.
Thankfully, Friday’s data showed US job growth for April 2024, slowed more than expected. (see above)
More importantly, it is lower than the 3-months moving average of 242,000.
This took the pressure off the Fed to keep rates higher for longer.
Coupled with current earnings season, with surprising upside, they have given investors renewed positive moment in recent sessions.
The latest CME Fedwatch tool has forecasted the first possible interest cut could take place as early as September 2024 with the caveat that inflation continues to cool in the coming months between May to August. (see below)
This is consistent with LSEG's rate probability app.
Probability of interest rate remaining status quo: 31.3%.
Probability of a 0.25% cut : 49.4%.
Probability of a 0.5% cut: 18%.
Fed Officials - Hard @ work.
Apart from that, Fed officials have also restarted their socialization engine to drive home and reinforce the conditions in which interest cut will happen. (see below)
It will be a jammed packed week with different Fed officials taking to the different media platform.
Richmond Fed President, Thomas Barkin:
“Current interest rate level should cool the economy enough to return inflation to the central bank's 2% target, with the strength of the job market giving officials time to wait”.
A voter in 2024 on interest rate policy, added that inflation "data whiplash" supported the Fed's deliberative policy towards interest rates.
New York Fed President, John Williams:
Interest rate cuts would happen.
Monetary policy is currently in a very good place.
Minneapolis Fed President, Neel Kashkari:
“If inflation starts to tick back down or we saw some marked weakening in the labour market then that might cause us to cut back on interest rates.”
if we get convinced eventually that inflation is embedded or entrenched now at 3 per cent and that we need to go higher, we would do that if we needed to.
that’s not his most likely scenario – and the bar for raising rates is quite high – but he would not rule it out.
There will be more “personal” views coming from other Fed members for the remaining of this week. Keep a watchout!
Who Benefits From Interest Cut.
While keeping a close watch over an impending interest cut, we have also to keep a watch out for the sectors that will benefit from the cut and make plans to get into the game before it’s too late?
In no particular order, the top 3 sectors that will benefit the most.
(1) Technology (XLK).
Tech companies rely heavily on borrowing to fund (a) research and development, (b) expansion, and (c) acquisitions.
A decrease in interest rates makes borrowing more affordable, potentially fueling further growth and innovation in the sector.
Stocks of interest: $Apple(AAPL)$, Microsoft (MSFT), and $Alphabet(GOOG)$.
These companies have strong balance sheets and can capitalize on increased consumer spending.
(2) Consumer Discretionary (XLY).
Consumers tend to spend more on discretionary items like electronics, travel, and leisure activities, when interest rates decrease.
This benefits companies in the consumer discretionary sector.
Stocks of Interest: $Amazon.com(AMZN)$, Walt Disney (DIS), and $Nike(NKE)$.
These firms cater to consumer preferences and may see increased sales.
(3) Financial (XLF).
Lower interest rates reduce borrowing costs for banks and financial institutions.
Additionally, a steepening yield curve (where long-term rates rise relative to short-term rates) can improve bank profitability.
Stocks of interest: JPMorgan Chase (JPM), $Bank of America(BAC)$ and Goldman Sachs (GS).
These banks could benefit from increased lending activity and improved net interest margins.
My Viewpoints: (mine & mine only)
I feel the beneficiary stocks recommended are approaching the “overpriced” zone, except for Nike.
Still investible just that need to hawk over them and buy when” opportunity” arises, due to market’s knee jerk reaction.
Alternatively, look for other overlooked “value” stocks within the 3 sectors as substitute.
Examples: Swiss bank UBS Group AG (UBS). SoFi Technologies Inc (SOFI), Nu Holdings Ltd (NU)
There are “hidden” gems in the US market apart from the usual stocks that hogs the limelight. Need patience and sieve thru them, to find your unpolished gem/s.
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Disney is doing so badly these days!
Never sell keep holding! We’ll win after 10 years
Great read!!! Great news for rates cute!
Great, cut rate
Pls help to "Re-post". Tks! Rating is important (to me).
Would you consider "Follow me" and get first hand read of my Daily new posts? Thanks!). Tks!
Great article, would you like to share it?
Great article, would you like to share it?