Stocks to Trade After Back-to-Back Fed Rate Cuts

Some consumer staples stocks have performed well after these Fed signals

by Andrea Kramer

Published on Sep 24, 2019 at 10:54 AM
Updated on Sep 24, 2019 at 10:54 AM

The Fed last week opted to cut interest rates by another quarter point -- much to the dismay of President Donald Trump -- though the central bank's corresponding statement and Fed Chair Jerome Powell's subsequent press conference pointed to a division about further action this year. While we recently outlined the best and worst stocks to own after single Fed rate cuts, we decided to crunch the numbers on what a second rate cut in 60 days could mean for the stock market -- and which stocks could thrive, if past is prologue.

Using Federal Reserve Economic Data (FRED) for the federal funds target rate, Schaeffer's Senior Quantitative Analyst Rocky White analyzed each time the central bank cut rates for the second time in 60 days. Specifically, he used only the first signal over a one-year period, looking at data since 1983, resulting in 10 instances. The last time this occurred was in October 2007, which marked the first signal in more than six years. Below are the S&P 500 Index (SPX) returns after those instances.

SPX after 2nd fed rate cut in 60 days

As you can see in the chart above, the past two signals preceded bearish price action for the SPX over the subsequent six months. Of course, those signals roughly corresponded with the dot-com bubble bursting and the financial crisis, which should be taken into consideration. Following signals before the turn of the millennium, the SPX performed relatively well at most benchmarks. 

On average, though, the S&P 500 has dropped 0.1% in the two weeks following a second Fed rate cut in 60 days. Further, the index was positive just half the time at this checkpoint. That's compared to an average anytime two-week gain of 0.38%, with a positive rate of nearly 60%, looking at stats since 1983.

One, three, and six months after signals, the SPX generated slightly weaker-than-usual returns, though volatility ran hotter than normal, looking at the Standard Deviation rows below. Also notable, three months after signals, the index was higher just 40% of the time, compared to 69.2% anytime.

SPX after fed signals vs anytime

So, how should one invest after a double rate cut, so to speak? The table below looks at individual SPX stocks after the 10 aforementioned Fed signals. In order to be eligible, stocks had to have at least five trading points (meaning they've been around since at least 1990).

Considering the Fed often cuts rates during times when the economy needs support, it's not entirely surprising that consumer staples stocks Hormel Foods Corp (NYSE:HRL) and Clorox Co (NYSE:CLX) are near the top of the list. Both equities were higher a month later 90% of the time, averaging gains of 5.55% and 5.86%, respectively. Meanwhile, Walmart Inc (NYSE:WMT) emerged as the top Dow stock on the list, averaging a monthly gain of 5.1% and higher 80% of the time after two Fed rate cuts in 60 days.

best stocks after 2 fed rate cuts

On the other hand, while several tech stocks made the list of worst stocks to own after quick-and-dirty rate cuts, Monster Beverage Corp (NASDAQ:MNST) was at the top of the list. The equity has moved higher over the subsequent month just 17% of the time, averaging a loss of 3.6%.

worst stocks after 2 fed rate cuts


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