These stocks are typically the best bets when the Fed jolts the economy with three rate cuts
Traders and financial professionals work on the floor of the New York Stock Exchange.
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The stage appears to be set for stocks to shine after the Federal Reserve’s third rate cut this year and its signal to stop from now. And certain groups of stocks stand to benefit the most, if history is any guide.
The three-and-done approach was used on two occasions in history — between 1995 and 1996 and in 1998. The Alan Greenspan-led Fed slashed rates by a total of 75 basis points during both periods to combat an economic downturn and successfully prolong the expansion.
The Fed’s insurance easing episodes in the 1990s managed to drive the S&P 500 22% higher on average a year after the third cut, CNBC analysis found. The move was particularly beneficial for cyclical stocks — including tech, energy and industrials — as investors bet on economically sensitive pockets of the market after Fed rate cuts.
CNBC, using hedge fund analytics tool Kensho, found that information technology stood out as the best-performing sector after the central bank cut rates three times and paused, surging a whopping 66% a year after the third cut on average. Energy and industrial stocks jumped about 24% on average during the same period.
It’s not surprising that cyclical stocks have historically enjoyed the biggest boost from Fed rate cuts. As monetary easing is designed to jolt the economy, investors tend to gravitate toward stocks traditionally correlated to economic growth.
To be sure, the tech sector’s stunning pop in the 1990s happened when there was a rapid rise in U.S. tech stock valuations at the height of the dot-com bubble. So the Fed cut should have less of an impact on the group this time.