Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Amazon AMZN Stock PRIMEDAY SALE! Trend Analysis - 20th Apr 21
Stock Market Sentiment Speaks: You May Not Believe My 2021 Targets - 20th Apr 21
Stock Market Phase Two Projection - 20th Apr 21
Are Precious Metals & Miners Starting A New Longer-Term Bullish Trend? - 20th Apr 21
Inflation: First the Gain, Then the Pain… - 20th Apr 21
8 Stock Market Indicators in 1: Here's the Message of the Panic/Euphoria Model - 19th Apr 21
Gold - You Can Win a Battle, but Still Lose the War - 19th Apr 21
Will Interest Rates Rally Further Push Gold Price Down? - 19th Apr 21
Gold Fireworks Doubt the Official Inflation Story - 19th Apr 21
YuanPay Team Discuss The Process Of Crypto Diversification - 19th Apr 21
Central Banks May Ramp Up Gold Buying - 18th Apr 21
How to Get Rid of Driveway Weeds With Just WATER! 6 Months later NO Weeds, Ultimate Killer! - 18th Apr 21
State of the European Markets - DAX, FTSE, CAC, AEX, SMI, IBEX 35, S&P/MIB, Euro Stoxx 50, RTS - 18th Apr 21
Einvestment Fund: What You Need To Know About Investments - 18th Apr 21
Google Alphabet (GOOG) AI Deep Mind Stock Trend Analysis - 17th Apr 21
Stocks and Bonds Inflationary Slingshot - 17th Apr 21
Best Smartphone Selfie Stick Tripod Review by ATUMTEK Works with Samsung Galaxy and Iphone - 17th Apr 21
How to Give Budgie's First Bath | Easy Budgie Bathing and Water Training with Lettuce - 17th Apr 21
Record-breaking Decrease in New Passenger Vehicle Sale in Europe - 17th Apr 21
US Stocks Climb A “Wall Of Worry” To New Highs - 16th Apr 21
Gold’s Singular Role - 16th Apr 21
See what Anatomy of a Bursting Market Bubble looks like - 16th Apr 21
Many Stock Market Sectors Are Primed For Another Breakout Rally – Are You? - 16th Apr 21
What Skyrocketing US Home Prices Say About Inflation - 16th Apr 21
Still a Bullish Fever in Stocks? - 16th Apr 21
Trying to Buy Coinbase Stock on IPO Day - Institutional Investors Freeze out Retail Investors - 15th Apr 21
Stocks or Gold – Which Is in the Catbird Seat? - 15th Apr 21
Time For A Stock Market Melt-Up - 15th Apr 21
Stocks Bull Market Progression Now Shows Base Metal Strength - 15th Apr 21
AI Tech Stocks Buy Ratings, Levels and Valuations - 14th Apr 21
Easy 10% to 15% Overclock for 5600x, 5900x, 5950x Using AMD Ryzen Master Precision Boost Overdrive - 14th Apr 21
The Current Cannabis Sector Rally Is Pointing To Another Breakout - 14th Apr 21
U.S. Dollar Junk Bond Market The Easiest Money in History - 14th Apr 21
The SPY Is Nearing Resistance @ $410… What Is Next? - 14th Apr 21
The Curious Stock Market Staircase Rally - 14th Apr 21
Stocks are Heating Up - 14th Apr 21
Two Methods in Calculating For R&D Tax Credits - 14th Apr 21
Stock Market Minor Correction Due - 13th Apr 21
How to Feed Budgies Cucumbers - Best Vegetables Feeding for the First Time, Parakeet Care UK - 13th Apr 21
Biggest Inflation Threat in 40 Years Looms over Markets - 13th Apr 21
How to Get Rich with the Pareto Distribution - Tesco Example - 13th Apr 21
Litecoin and Bitcoin-Which Is Better? - 13th Apr 21
The Major Advantages Of Getting Your PhD Online - 12th Apr 21
Covid-19 Pandemic Current State for UK, US, Europe, Brazil Vaccinations vs Lockdown's Third Wave - 12th Apr 21
Why These Stock Market Indicators Should Grab Your Full Attention - 12th Apr 21
Rising Debt Means a Weaker US Dollar - 12th Apr 21
Another Gold Stocks Upleg - 12th Apr 21
AMD The ZEN Tech Stock - 12th Apr 21
Overclockers UK Build Quality - Why Glue Fan to CPU Heat sink Instead of Using Supplied Clips? - 12th Apr 21 -
What are the Key Capabilities You Should Look for in Fleet Management Software? - 12th Apr 21
What Is Bitcoin Gold? - 12th Apr 21
UK Covd-19 FREE Lateral Flow Self Testing Kits How Use for the First Time at Home - 10th Apr 21
NVIDIA Stock ARMED and Dangeorus! - 10th Apr 21
The History of Bitcoin Hard Forks - 10th Apr 21
Gold Mining Stocks: A House Built on Shaky Ground - 9th Apr 21
Stock Market On the Verge of a Pullback - 9th Apr 21
What Is Bitcoin Unlimited? - 9th Apr 21
Most Money Managers Gamble With Your Money - 9th Apr 21
Top 5 Evolving Trends For Mobile Casinos - 9th Apr 21
Top 5 AI Tech Stocks Investing 2021 Analysis - 8th Apr 21
Dow Stock Market Trend Forecast 2021 - Crash or Continuing Bull Run? - 8th Apr 21
Don’t Be Fooled by the Stock Market Rally - 8th Apr 21
Gold and Latin: Twin Pillars of Western Rejuvenation - 8th Apr 21
Stronger US Dollar Reacts To Global Market Concerns – Which ETFs Will Benefit? Part II - 8th Apr 21
You're invited: Spot the Next BIG Move in Oil, Gas, Energy ETFs - 8th Apr 21
Ladies and Gentlemen, Mr US Dollar is Back - 8th Apr 21
Stock Market New S&P 500 Highs or Metals Rising? - 8th Apr 21
Microsoft AI Azure Cloud Computing Driving Tech Giant Profits - 7th Apr 21
Amazon Tech Stock PRIMEDAY SALE- 7th Apr 21
The US has Metals Problem - Lithium, Graphite, Copper, Nickel Supplies - 7th Apr 21
Yes, the Fed Will Cover Biden’s $4 Trillion Deficit - 7th Apr 21
S&P 500 Fireworks and Gold Going Stronger - 7th Apr 21
Stock Market Perceived Vs. Actual Risks: The Key To Success - 7th Apr 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

How to Beat the Market by Playing the Federal Reserver US Interest Rate Cuts

Stock-Markets / US Stock Markets Nov 06, 2007 - 09:26 PM GMT

By: Hans_Wagner

Stock-Markets Best Financial Markets Analysis ArticleOn October 31, 2007 the Federal Reserve lowered the Fed Funds and Discount rates by 0.25%. This is the second Fed Funds Rate reduction and the third for the Discount rate. In their announcement the Fed hinted that investors should not expect another rate move at their next meeting on December 11, 2007. In the hours after the announcement the market jumped up. The next day it fell on bad news from Citigroup regarding sub-prime mortgage loan write offs.


The question for investors is what they should do now. The chart below from www.chartoftheday.com indicates that the Fed Funds Rate is in a long term downward sloping channel. If the trend holds true then we should expect further rate reductions over time.

In a study titled Sector Rotation and Monetary Conditions by Robert Johnson, C. Mitchell Conover, Gerald R. Jensen, and Jeffrey M. Mercer and mentioned in the 10/12/2007 Point of Interest concludes that the markets go up when the Federal Reserve lowers either the Fed Funds or Discount rate at least two times in a row. Bill Gross the manager of the largest bond fund believes that the Fed Funds rate will fall another 1.00% to the 3.5% area over the next 12 months. However, not every sector and company will benefit equally. Value investors often look to sectors as they seek to buy good companies that are at a low relative price. Value Investing: From Graham to Buffett and Beyond by Bruce C. N. Greenwald, Judd Kahn, Paul D. Sonkin, Michael van Biema is a good book on value investing as practiced by Warren buffet, the best investor in the world. So what does this really mean for investors? 

Basic Themes

Let's start with a few basic themes and then discuss some potential action on the part of investors over a couple of relevant time frames. 

Dollar will go lower so all things priced in dollars will go up in price to compensate. This includes oil, metals, and agriculture products. Investors should look to buy companies that produce hard things, As Dennis Gartman, a noted commodity trader and publisher of The Gartman Letter said; “own something that when it falls will hurt your foot”. These have been doing well but they will continue to do well.

U.S. exports should continue to grow as the price of goods and services made in the U.S. will be lower relative to other currencies. Investors should look for companies that have a substantial export component to their business.

Inflation is likely to go higher. The price of goods and services that are imported and not tied to the U.S. dollar will rise. Companies that import their products are likely to encounter higher prices. This is especially true for retailers who source production of their products to overseas countries whose currencies are not tied to the U.S. dollar.

Foreign investors may not buy as much U.S. debt if they can get better rates elsewhere. This may cause longer term rates to rise increasing the borrowing costs for companies that use the debt markets.

The Major Sectors

Being in the right sector is very important if you wish to beat the market. Fortunately, there are a number of ways to track each sector. For today's purposes we will discuss the nine major sectors and for your reference the Sector SPDR Exchange Traded Fund (ETF) that tracks the sector. The link will take you to a www.StockCharts.com annotated chart for the sector.

Sector Sector SPDR (ETF)
Consumer Discretionary
Consumer Staples
Energy
Financials
Healthcare
Industrials
Materials
Technology
Utilities

Next three to six Months

Continued global growth will be the driving theme with the U.S. transitioning through the credit and housing problems which will be on investors' minds and slow growth in the U.S. This will primarily benefit the companies that handle and make heavy things, especially the materials sector and the industrials. 

Technology should continue to outperform the S&P 500; especially the build out of the “Web 2.0” internet, wireless as the next generation of broadband comes online, and software that helps improve productivity of just about everything. Semiconductors have been lagging as many have become commodities, though they might catch up at some time in the future.

Energy, especially the refiners beginning in February, just before the start spring when they start to convert to summer grades stock up for the summer driving season. I expect the crack spread to widen, possibly up to the level of 2007 with alternative fuels providing some offset as the come on line.

Consumer goods both staples and discretionary will continue to match the market as the slow down in the U.S. affects their sales. Those with substantial international sales will perform better as they benefit from the growth in those countries.

Most of healthcare will struggle as the rhetoric grows from a better healthcare plan for the U.S. driven by the coming Presidential election. There will be some firms that have a unique franchise that will perform well, especially those that improve the productivity of the development new drugs and delivery of healthcare services.

Avoid financials as they will continue to have unhappy surprises as new problems with their vast portfolios of bad loans come to light.

Utilities should continue to do well as lower interest rates increase the value of their dividends to investors.

Six Months to a Year

Global growth will continue though there are some who believe after the Summer Olympics in China that a slow down is inevitable. We might see slower growth, but growth will still be taking place driving the demand for materials, energy and infrastructure.

Look for selected areas of technology to continue to beat the S&P 500 as the transition to the Web 2.0 continues and new and exciting capabilities become available to consumers and businesses. There will also be sub-sectors and companies that under perform, so it is paramount to do your homework and be selective.

It will take at least six months before the financials to complete the digestion of the sub-prime mortgage and credit problems. Once they do I expect them to become strong performers most likely starting with the regional banks as they have had the least exposure to the sup-prime loan problem.

Healthcare will still be in the spotlight as the U.S. Presidential election really gets underway causing the sector to under perform. Eventually the aging population in the U.S. and the rest of the world will make healthcare an important sector.

If rates are still coming down then utilities should continue to be a good sector for more conservative investors. Also monitor the growing demand for electricity as utilities will have to increase their power generating capacity over time. This can be an expensive as well as risky proposition as they debate use of coal vs. nuclear.

Over One Year

It will be necessary to assess the continued demand for materials such as copper, iron ore, fertilizer, etc. If the global growth continues as some expect then these sectors should still do well, though not at the same pace as before. Industrial firms may encounter a slow down due to the overheating of the global economies. Review the current demand situation before making any new commitments.

Review the current trend for technology as it is subject to change depending on the strength of the economy and introduction of new capabilities.

We will see more demand for consumer goods both discretionary and staples across the globe as consumers in the BRIC countries and other growing economies earn the income to buy goods and services previously only available to the middle class of more developed countries. It should be a good time to be invested in the consumer companies that are being avoided today.

Financials, especially the big money center and investment banks should do well. As the lower rates help improve their interest rate spread and the large loan write offs of the past year subside.

We should begin to get a clearer picture of what the U.S. government might do regarding healthcare in the U.S. the ongoing aging of the population will drive the demand for drugs and services, though it just depends on what changes the U.S. government might make to change the structure of the sector.

If the economies of the world are growing and interest rates have either reached their low or are going back up then utilities will likely not be the best place to invest. It will be important to assess the status of the world's economies before making the decision.

The Bottom Line

With the Federal Reserve lowering key Federal Funds rates, it is important for investors to be in the right sectors to help them beat the market. In selecting the right sectors investors should develop a well thought theme that articulates their view of the sector and sub-sector. It also helps to have a time frame in mind when performing this important exercise. Many investors read Barron's . A weekly magazine for investors that contains some of the best analysis on companies, markets and the economy to help them develop their themes.

By Hans Wagner
tradingonlinemarkets.com

My Name is Hans Wagner and as a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market at http://www.tradingonlinemarkets.com/

Hans Wagner Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules