Article Highlights:
- The market has declared a 100% probability of an interest rate cut.
- I looked at the last four rate-cut cycles, which started in the years 1989, 1995, 1998 and 2007.
- Two sectors had the most winners in those time frames.
If I offered you the ability to see into the future, I believe most of you would take me up on it.
For example, more than half of expectant parents (both women and men) learn the gender of their baby before the child is born.
If we don’t have to wait, we don’t want to. Plus, there can be benefits to knowing things early.
In that light…
We’ve talked in recent essays about the potential for the Federal Reserve to cut rates soon.
The market now believes the Fed will cut rates in its July 31 meeting.
In fact, it’s certain of it. Per Bloomberg, the market has declared a 100% probability of a cut.
So, given that, it’s worthwhile to do some digging into history.
I decided to research which stocks in the S&P 500 Index did the best during the past four rate cuts. You’ll be interested to learn what I found…
The Setup
The last four rate-cut cycles started in the years 1989, 1995, 1998 and 2007.
If you recall from my last essay, I looked at the returns from:
- The first rate cut to the last rate cut.
- The first rate cut to six months after the final rate cut.
I included the second time frame so we could see more of the effects of the rate cuts.
I looked at the 25 best-performing stocks in the S&P 500. As a practical matter, I wanted the names of stocks that I can invest in today.
Here are the sectors from each period that had at least five of the top 25 stocks:
(Source: Bloomberg)
As you can see, there’s no clear-cut winner.
There’s no single sector that always had at least five of the top 25 stocks.
There are some important takeaways from these numbers, though.
Tech Wins … Sometimes
We were in the dot-com era in the late ’90s.
As such, we saw the greatest gains from information technology stocks during this time frame. That was predictable.
And we may be seeing it again.
We’re currently in the biggest initial public offering market since the late ’90s. Information technology stocks are benefiting more than any other sector as a result.
We saw a bit more variety in the top sectors during the other three periods.
These 2 Sectors Win — a Lot
Owning the right consumer discretionary and health care stocks made sense in these rate-cut cycles. During the shorter time frames profiled above, these two sectors had the most big winners.
There were 12 stocks with returns great enough to make the top 25 twice. Nine of them were from these two sectors.
They were:
- Health care: Amgen, Boston Scientific, Gilead Sciences and Hologic.
- Consumer discretionary: Amazon, Best Buy, eBay, H&R Block and Ross Stores.
An E-Commerce Monster
I wrote an essay about eBay Inc. (Nasdaq: EBAY) in May of last year. Shares are up 5% since then.
That’s OK. But the most important thing isn’t its total return. It’s who has entered the picture.
Three influential hedge funds have taken stakes in eBay since then.
Seth Klarman’s Baupost Group bought 21 million shares in the fourth quarter of last year. Today, with just under 30 million shares, it’s eBay’s fifth-largest owner.
Klarman has been called “the Oracle of Boston” because his patient investing style is like Warren Buffett’s. His track record is too.
And Paul Singer’s Elliott Management took a 9.9 million-share stake in the first quarter, while activist Starboard Value owns 6.3 million.
After they bought, Elliott and Starboard called for change.
Elliott wants eBay to sell or spin off its ticket business, StubHub, and its international classified ads business. That will leave it to focus on its core e-commerce business.
It said eBay should return 80% of its free cash flow to shareholders through a dividend and share repurchases.
Starboard also called for the spinoff of StubHub.
EBay has met the investors partway. At the end of January, it announced a $0.14 quarterly dividend and increased its buyback program to $4 billion.
It also appointed two new directors — one from Elliott, and the other a CEO whom Starboard supports.
To date, however, the groups don’t agree on whether the company’s assets should be spun off.
But the future looks brighter. Shares bottomed in December, just before Elliott and Starboard took their stakes. Since then, management and the funds have partnered and appear to be acting in a constructive manner.
Elliott estimates its suggested changes will raise the stock price closer to $60. That’s 50% higher than current levels.
Plus, eBay tends to perform well during rate-cut cycles anyway.
I suggest you consider buying shares today.
Good investing,
Brian Christopher
Editor, Insider Profit Trader