Taking Stock of a Rate Hike
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:
De Guia is an analyst for Standard & Poor's Portfolio Services