Taking Stock of a Rate Hike

Equities tend to fall when tightening occurs, but there are refuges -- and health care and info tech are two of them

By Numer de Guia

Speculation is mounting that the Federal Reserve will pull the trigger on an interest rate hike within the coming months. Indeed, Standard & Poor's Chief Economist David Wyss expects Alan Greenspan & Co. to increase the benchmark Fed funds target rate by 25 basis points, to 1.25%, at the Fed's June policy meeting.

What can equity investors expect after the Fed begins to raise interest rates? S&P chief investment strategist Sam Stovall recently conducted a study assessing the effect on the stock market -- and individual sectors -- during past Fed rate-hike cycles (see BW Online, 4/21/04, "Where Rising Rates Will Hit Hardest"). His study covered all six monetary tightening periods that have occurred since 1970.

IT TAKES TWO.

  Stovall found that the S&P 500-stock index falls 6%, on average, a year after the Fed starts a series of rate hikes. He also noticed that of the 10 major economic sectors under S&P's Global Industrial Classification System, only health care and information technology posted positive 12-month returns on average, after the initial Fed rate increase.

And it's that finding that forms the basis for this week's screen. We sifted for those issues within the health-care and info-tech groups carrying S&P's highest investment ranking, 5 STARS (buy). Stocks with that designation are expected by Standard & Poor's Equity Research analysts to outperform the overall market by a wide margin over the next 6 to 12 months:

These are the names that emerged, by sector:

Top Picks: Information Technology
Company/ticker S&P STARS Rank
Adobe Systems (ADBE ) 5
Affiliated Computer Services (ACS ) 5
Analog Devices (ADI ) 5
Applied Materials (AMAT ) 5
Automatic Data Processing (ADP ) 5
BEA Systems (BEAS ) 5
Cisco Systems (CSCO ) 5
Cree (CREE ) 5
Emulex (ELX ) 5
Flextronics International (FLEX ) 5
Helix Technology (HELX ) 5
Intel (INTC ) 5
IBM Corp. (IBM ) 5
Intrado (TRDO ) 5
Microchip Technology (MCHP ) 5
Microsoft (MSFT ) 5
MKS Instruments (MKSI ) 5
Open Text (OTEX ) 5
Qualcomm INC (QCOM ) 5
Sybase INC (SY ) 5
Vishay Intertechnology (VSH ) 5
Xilinx (XLNX ) 5
Top Picks: Health Care
Aetna (AET ) 5
Amgen (AMGN ) 5
Andrx Group (ADRX ) 5
Cardinal Health (CAH ) 5
Caremark Rx (CMX ) 5
Celgene (CELG ) 5
Coventry Health Care (CVH ) 5
Cytyc (CYTC ) 5
Hologic (HOLX ) 5
Medtronic (MDT ) 5
Mylan Labs (MYL ) 5
Oxford Health Plans (OHP ) 5
Pfizer (PFE ) 5
Triad Hospitals (TRI ) 5
Varian Medical Systems (VAR ) 5
Wyeth (WYE ) 5
Zimmer Holdings (ZMH ) 5

De Guia is an analyst for Standard & Poor's Portfolio Services

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