Lineages have rebounded sharply in recent days as investors expect a new round of Federal Reserve rate cuts. The into question is how to profit off it. Goldman Sachs Group Inc. says there may be four key ways that investors can outperform during the 12 months after the beginning rate cut if the Fed take steps to extend the length of the 10-year bull market. That includes two sector plays, which are condition care and consumer staples stocks, and two thematic plays, which are momentum or low volatility stocks.
Investors anticipate the head rate cut will come before the end of 2019, followed by several more in 2020. No matter what investors buy, they last will and testament have the wind at their back. “The S&P 500 index has typically generated strong returns at the beginning of Fed cutting sequences,” Goldman says in its latest Weekly Kickstart report. Goldman studied S&P 500 Index returns during the 35 years come after the start of 7 Fed rate cutting cycles, or the first interest rate cut during the trailing 12 months. The index be elevated by a median of 2% during the first three months, and by an impressive 14% during the 12-month period after the start of a Fed severe cycle.
4 Ways to Play the Next Round of Rate Cuts:
- Health Care
- Consumer Staples
- Low Volatility
- Power
Source: Goldman Sachs
What it Means for Investors
Investor anticipation of lower rates has been fueled by ensigns of a slowing economy, including weakness in manufacturing and jobs data last week, with futures markets now cost out in the 90% likelihood of a Fed rate cut before the year is out.
Goldman says that these two sectors and two themes may be the best way to profit in this circumstances, at least in the first year.
Sectors
The top performing sectors in Goldman’s analysis were health care and consumer usuals. Health care has outpaced the S&P 500 by a huge margin, a median of 9 percentage points, over the 12 months go after the start of a rate-cutting cycle. Consumer staples stocks have posted similar gains. By contrast, Goldman notes that the communication posts sector posted strong returns three months after a rate cut but fared poorly over 12 months. And tech amasses were the worst performing sector, lagging by 13 percentage points over one year.
Momentum, Low Volatility Selections
Goldman’s study also showed that its “long/short Momentum factor” returned a median of 9% during year reinforcing prior rate cuts, and 13% if one excludes the years 1998 and 2001, when cuts came as a surprise. The stubborn gave less detail about low volatility themes, but it noted that low volatility performed extremely well decisive month, rising 9% as a group.
Looking Ahead
The question of whether the Fed will or will not cut is still open. But it is significance noting that on 13 occasions since 1988, when futures markets expected a cut in the fed funds rate the day last to a Federal Open Market Committee (FOMC) meeting, the Fed cut rates every time. Further, only twice settled the past 30 years has the Fed not cut interest rates when futures markets have predicted a cut 30 days former to a scheduled FOMC meeting. Goldman says the market expects rates to stay unchanged after the Fed’s meeting next week, but that a proportion rank cut is expected in July.