What happens to stocks after the Fed cuts rates?
The U.S. Federal Reserve’s jumbo interest rate cut to kick off this rate cutting cycle fueled stocks even higher this past week.
While skeptics have been vocal throughout this bull market, history would suggest being positioned in stocks may continue to make sense.
Since 1929, the S&P 500 has gained an average of 11% in the year that follows the first Fed rate cut. Mind you, performance tends to differ based on whether there’s a recession or not. The average gain in recessions is about 8%. If there’s no recession, the average rises to around 17%. But both of those situations yielded positive returns, on average.
Meanwhile, U.S. election years tend to be a positive for the market too.
We’ll see if the historical tailwinds hold true this time around.
The power of clean power
Shares of Constellation Energy surged this week after the company signed a deal with Microsoft to restart one of the units at the Three Mile Island nuclear plant.
The agreement highlights how utilities are benefiting from the growing demand from data-centre operators, riding the AI wave.
Interestingly, over the past 3 years, investing in clear power stocks would’ve netted you fairly impressive returns compared to some of the AI plays.
That group, which includes names such as Constellation Energy and PG&E, has outperformed the so-called Magnificent 7 stocks over that period.
Andrew John Stevenson, a senior analyst with Bloomberg Intelligence, notes that aside from the huge increase in demand for power from companies working on AI, the sector is benefiting from low-carbon incentives in the Biden administration’s Inflation Reduction Act.
Playing Offense and Defense at the Same Time
David Nelson, Chief Strategist at Belpointe Asset Management remains bullish on that power theme.
He really likes the Virtus Reaves Utilities ETF, which he says is one of the only actively managed utility funds. And it has exposure to Constellation Energy, as well as Vistra.
He sees the sector as a way to play both offense and defense.
He feels the same way about IBM, which has enjoyed a nice rally already.
He expects continued benefits ahead for IBM’s business from the AI boom, not to mention a reasonable valuation and steady dividend payments.
Keep an eye on dividend growth stocks
With rates coming down, many pundits have advised shifting money out of short term savings vehicles into investments that could offer attractive comparable yields. Indeed, a number of defensive stocks with reliable dividend yields have done well of late. But Alec Young, Chief Investment Strategist of MapSignals, is encouraging investors to look closely at dividend growth stocks.
He’s circling stocks that have a track record of appreciating in value, yes…but also, of doubling their payouts at least every decade. He notes these names tend to do better than just defensive plays.
Young’s view is that you should think less about groups like utilities and energy…and more about tech and health care.
Both of those latter-mentioned sectors have a solid weighting in the Vanguard Dividend Appreciation ETF, which Young sees as a great way to get exposure to these stocks.
Alphabet becomes one of the most talked about stocks
A lot of stock pros I’ve been speaking with have increasingly been recommending Alphabet.
Antitrust worries had been weighing on the shares, prompting several observers to cite a buying opportunity.
Among them, Will McGough, Director of Investments at Prime Capital Financial. In his view, the strength of YouTube, Alphabet’s generative AI efforts, and Waymo’s expanded partnership with Uber are all reasons to own this name.
Note Alphabet’s valuation is the cheapest among the so-called Magnificent 7. And as Bloomberg noted this week, it’s also trading at a discount to its long term average.
That’s not to say the antitrust issues won’t hang over the stock.
But in a research note to clients, analyst Mark Mahaney of Evercore ISI suggested the profit concerns could be overblown.
“Put it this way, Google could lose as much as 60% of its exclusive deal search revenue and still suffer only a single digit percentage loss in EPS.”
Real estate names with upside?
Real estate stocks have enjoyed a nice run, rallying on the expected benefits from a lower interest rate environment. Of course, not all REITs are created equal and longtime investor Colin Stewart has a narrowed view on which names may continue to gain ground.
Colin Stewart, the CEO and portfolio manager at JC Clark, shared two in particular with me that he’s bullish on, based on business prospects and valuations: Dream Unlimited and Interrent.
Time to take profits in gold?
Make no mistake…gold has had a great run. Thematically, bullion fans could not have asked for a more bullish environment. And many of the pros I speak to see more upside.
That doesn’t mean you shouldn’t take some profits.
That was the advice this week from Sadiq Adatia, CIO at BMO Global Asset Management.
Gold, as a recommendation, has done well for him and he continues to suggest having exposure, while also taking some money off the table.
People are getting older…and stocks may benefit from that.
I had a good conversation this week about the so-called “greying economy.”
According to UN estimates, the global population of people aged 60 and above will double by the year 2050. Canada and the U.S. are part of this greying trend.
Neela White, Senior Portfolio Manager at Blue Wing Advisory Group with Raymond James shared a few stocks she likes to capitalize on that macro reality.
They are Eli Lilly, Addus Homecare and Sienna Senior Living.
Picks of the week:
Jamie Murray, The Murray Wealth Group: Pro REIT, European Residential REIT, Northwest Healthcare, Flagship REIT
Will McGough, Prime Capital Financial: Alphabet, Walmart, Salesforce, Avantis US Small Cap Value ETF
Ross Gerber, Gerber Kawasaki: Lennar
Brian Belski, BMO Capital Markts: Truist Financial, Canadian Tire
Tim Urbanowicz, Innovator Capital Management: Target
Rick Rule, Rule Investment Media: Franco Nevada, Wheaton Precious Metals, Agnico Eagle
Neela White, Blue Wing Advisory Group, Raymond James: Walmart, Home Depot, Dollarama
Interested in the gold call: With inflation cooling and geopolitical risk at peak (imo) I’m pretty negative on gold atm. Wonder what you think Jon?