February 12, 2001
Barron's Weekday Trader
Who Are the Winners a Year After a Rate Cut?
By DIMITRA DEFOTIS
We all know that stocks tend to do well six months after the Federal Reserve cuts interest rates.
A widely circulated study by Standard & Poor's reports that, going back to 1971, the S&P 500 Index has been up 12% on average six months after the first time the Fed cuts rates.
Six months after a rate cut, consumer staples, technology, consumer cyclicals and health care are the best performing stock groups.
But how about 12 months down the road?
Historically, that has depended on whether the profit cycle is heading up or down.
During Fed Chairman Alan Greenspan's tenure, the two times the profit cycle was accelerating, cyclical stocks outperformed after rate cuts. The other two times, when the profit cycle was decelerating, higher-quality growth stocks shone.
The bottom line: "The Fed can provide liquidity to the marketplace, but the contours of the marketplace determine where that liquidity flows," says Kari Bayer, senior quantitative strategist at Merrill Lynch.
The sectors that tend to do the best 12 months after the Fed starts cutting are waste management and footwear, each with an average 37.7% gain; retail drug stores, which rose 35.3%, and broadcasting (television, radio and cable), which advanced 34.6%, says Sam Stovall, a senior S&P investment strategist.
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