Stock Market Winners: Predicting which Stocks Will Thrive Based on the Federal Reserve's Decisions

Stocks Most Affected by Fed Interest Rate Moves

Scenario #1: Fed Raises Rates

When the Federal Reserve makes its policy decision Wednesday afternoon, certain stocks have the most at stake because of their historical correlation to interest rate moves. Traders are assuming the Fed will raise its benchmark rate for the 11th time in this cycle, but what they don't know is what Fed Chief Jerome Powell will say about the central bank's future policy at his press conference following the decision. There are two likely scenarios:

1. The Fed raises its fed funds rate, but Powell signals the inflation fight is far from over. Market rates are likely to shoot higher, benefiting a select group of stocks highlighted below, while causing the broader market to decline.
2. The Fed raises and takes a wait-and-see approach, hinting that it could be done hiking for this cycle. Market rates are likely to decline and the broader stock market is likely to rally, with a certain group of stocks highlighted below gaining the most.

Winners if Rates Spike

Heading into Wednesday, certain investors are saying this scenario is the most likely, especially given the recent rally in stock prices. "Investors should beware of becoming too optimistic that today will mark the end of the rate-hiking cycle," wrote Solita Marcelli, chief investment officer Americas for UBS Global Wealth Management. "The Federal Reserve will remain eager to stress its inflation-fighting credentials." To find the winners if rates spike on the Fed, CNBC PRO looked at the Russell 1000 stocks with the highest correlation to rising rates over the last 50 days. In order to do this, they used the short-term bond fund, the iShares 1-3 Year Treasury Bond ETF, as their proxy for the bond market. They found the stocks with the highest negative correlation to bond prices, which means these stocks could win if rates increase. By no coincidence, insurer Primerica is at the top of the list. If rates move higher on the Fed, Primerica can charge higher rates for its insurance and financial products.

Scenario #2: Fed Signals Lower Rates

Now let's look at the winners if the Fed signals it could be done and rates move lower. The following stocks have the highest positive correlation with short-term bond prices, meaning they would benefit from a falling rates scenario. This group includes a mix of risky stocks that would benefit from a market rally induced by falling rates. There are also direct beneficiaries, such as fintech PayPal, which would be helped by lower interest rates boosting transactions and lowering what it has to charge consumers.

Conclusion: Implications for New Businesses

The Federal Reserve's interest rate decisions can have a significant impact on stock prices and market conditions as demonstrated by the scenarios outlined above. For new businesses, understanding and anticipating these potential effects is crucial for strategic planning and decision-making. In the first scenario, where the Fed raises interest rates and signals a continued fight against inflation, certain stocks have historically performed well. This suggests that businesses operating in sectors such as insurance and finance, like Primerica, could benefit from higher rates. Understanding the correlation between interest rates and industry performance can help new businesses position themselves to capitalize on potential opportunities in these market conditions. Conversely, in the second scenario, if the Fed signals lower rates, there may be winners in sectors that exhibit a positive correlation with short-term bond prices. Industries like fintech, represented by PayPal, could thrive in this environment as lower interest rates stimulate transactions and reduce costs for consumers. By identifying such sectors, new businesses can align their offerings to cater to the increased demand that could arise from a market rally induced by falling rates. For new businesses, keeping a close eye on the Federal Reserve's interest rate decisions and their potential impacts on the stock market can provide valuable insights. By staying informed, entrepreneurs can adapt their strategies and take advantage of market dynamics to enhance their chances of success. Additionally, monitoring the correlation between interest rates and specific industries can help guide investment decisions and allocation of resources. In conclusion, being aware of and responsive to the effects of interest rate moves can provide new businesses with a competitive edge and a greater understanding of the market landscape in which they operate. Article First Published at: https://www.cnbc.com/2023/07/26/these-stocks-will-be-the-big-winners-depending-on-what-the-fed-decides.html