The Federal Reserve is poised to cut the base rate on Wednesday for the first time since the global financial crisis. The big question is what happens to the Dow and the S&P 500?
Which Dow stocks will benefit from monetary easing at the Fed and which will suffer? CNBC tracked the stock market’s performance after each rate cut going back to 1990 and analyzed the results by segments.
The takeaway? Dump tech, telecoms, and bank stocks. Buy materials, industrials, and consumer spending stocks.
Which sectors tend to do well after the initial Fed rate cut?@CNBC used Kensho to find the top-performing sectors in the 6 months after the first rate cut in each cycle going back to 1990.
— Yun Li (@YunLi626) July 29, 2019
Dump tech, telecoms and banks
The analysis showed a clear loser in the historical data. Tech companies came out bottom when their performance was tracked six-months after a rate cut. Looking at the Dow, that means Apple, IBM, Intel, Microsoft, and Cisco could struggle for traction in the coming months. Telecoms firms also fared poorly so Verizon may come under pressure.
Wall Street banks may also have their upside dampened by a rate cut, as it cuts into their ability to turn a profit from interest. In its latest earnings report, JP Morgan cut its forecasts, warning that the bank’s lending income would take a hit if the Fed raises rates.
According to the CNBC figures, banks tend to perform in line with the broader stock market after a rate cut.
Dow stocks to buy if the Fed cuts rates
On the flip side, the research shows that materials and industrials dramatically outperform the wider market. Their cyclical nature means they respond quickly to monetary easing.
Looking at the Dow, that means Chevron, Exxon Mobile, Caterpillar, and Boeing could benefit from rate cuts (although Boeing remains plagued by outside fundamentals).
Consumer spending and staples also perform well after a rate cut. No surprise here since low rates encourage spending. The Dow is full of strong spending firms: Visa, American Express, Walmart, Nike, Coca-Cola, McDonald’s, and Home Depot.
Dow in wait-and-see mode
Dow futures struggled for traction in early trading Tuesday. The market remains in wait-and-see mode ahead of the crucial Federal Reserve interest rate decision on Wednesday.
Investors are also eagerly awaiting Apple’s earnings which are revealed after the market closes tonight.