Expectations that the Fed will start trimming interest rates have grown recently. Earlier, the Fed funds futures market was suggesting a 50-50 chance that the central bank will announce a rate cut in the July meeting. But now, the Fed funds futures market is showing an 85% chance of a July rate cut, which is up more than 25% from a month ago, according to the CME Group.
Some may argue that against the backdrop of a record-low unemployment rate, steady rise in wages and uptick in consumer outlays, a rate cut as early as this month seems impossible. But, the view from Wall Street is quite different.
After all, the stock market has been able to enjoy a decade-long bull market, as rates mostly remained low, which eventually infused life into stocks. And how can we forget that prolonged trade issues with the United States and its trading partners have raised concerns about global economic growth and corporate profit margins. Stocks, in fact, have fell nearly 7% from their recent highs.
By the way, the long-term interest rates are currently lower than short-term interest rates, which is a tell-tale sign that recession is knocking at the door. James Bianco, president of Bianco Research, an economic consulting firm in Chicago added that “the yield curve inversion is a market signal that the Fed is too tight, and that the Fed has raised rates too much.” The Goldman Sachs Group, Inc. GS also acknowledged that a few analysts have started to price in “insurance cuts,” which means it is expecting the Fed to cut rates right before a downturn in order to save the economy.
If not in July, the Fed will certainly cut rates this year. And that’s exactly what Bank of America Corporation BAC believes. The banking behemoth may not be expecting a rate cut in July, but is pinning hopes on a 0.25 percentage point rate cut in September, and then again in December.
There is also a lot of pressure from President Trump to cut interest rates. Trump is now challenging the Fed to do exactly what the ECB has decided. That is taking steps to ease monetary policy!
Healthcare Stocks Outperform After a Rate Cut
Barclays has compiled data that shows that healthcare stocks generally rise nearly 7% in the nine months following a rate cut. And what makes this set of stocks stand out is that they tend to rise consistently.
We all know that rate cuts mainly take place when the economy goes through a rough patch or is in recession. And healthcare stocks have time and again thrived in such scenarios. This is because they are mostly defensive in nature as their products are not directly related to the developments in the stock market.
Moreover, healthcare stocks are known for paying hefty dividends, which makes them more alluring when rates decline in uneasy economic conditions. Needless to say, lower interest rates mostly tend to raise prices of high-yielding stocks.
(Image Source: Barclays Research)
Some of the top healthcare stocks one may now consider include Molina Healthcare, Inc. MOH, Cardiovascular Systems, Inc. CSII, Magellan Health, Inc. MGLN and Repligen Corporation RGEN. All of them flaunt a Zacks Rank #1 (Strong Buy) and have consistently provided solid dividend yield over the past five-year period. You can see the complete list of today’s Zacks #1 Rank stocks here.
Rate Cut Loser – The Durables Sector
The durables sector tends to underperform after the Fed lowers rates and that too consistently. Traditionally, the sector has gained a meager 3% or slightly more after the central bank begins to lower interest rates, Barclays observed. Durable goods, by the by, includes autos, machinery and homes, which are very sensitive to the economic cycle.
Maneesh Deshpande, head of U.S. equity strategy at Barclays, noted that Fed will lower rates in the wake of soft economic conditions, if not a recession. During late-2018, utilities and nondurables, better known as recession outperformers, had rallied but tech shares, known as soft patch outperformers, had taken a hit. But now, techs have bounced back while utilities and nondurables are weighed down.
(Image Source: Barclays Research)
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Bank of America Corporation (BAC) : Free Stock Analysis Report
The Goldman Sachs Group, Inc. (GS) : Free Stock Analysis Report
Cardiovascular Systems, Inc. (CSII) : Free Stock Analysis Report
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