Let's see... Last week, the Philadelphia Fed Index for April showed a 7.2% decline, following a 23.5% slump for in March. That couldn't have been it. That was old news. So was the Industrial Production report, which actually posted a surprise increase of 0.4%. Nor was the CPI report anything to get concerned about, since it came in as expected by posting a 0.1% advance.
Was it something lurking in this week's reports? Well, Consumer Confidence is likely to slip to 115 from 117. I wouldn't lose sleep over that, nor would I be concerned over the projected 1.5% increase in Durable Goods Orders. In addition, New Home Sales and Existing Home Sales are likely to show a modest increase and decrease, respectively, while Q1 2001 GDP appears to have risen 0.8%. I would neither call that the makings of a recession, or the reason for an inter-meeting rate cut.
Maybe, like our parents, the Fed doesn't always need a reason to do things, especially when they are looking out for our own best interest. But I can tell you that it is not the first time that the Fed has acted this aggressively. A reporter called me last week saying "This is the first time in history that the Fed has done this!" Of course I was suspicious, so I went to the Fed's own web site (www.ny.frb.org/pihome/statistics/dlyrates/fedrate.html) and found that on four separate occasions, the Fed has cut rates four times in a row.
From a stock market standpoint, investors LOVE rate cuts. In the six and 12 months after each of these aggressive moves, the S&P 500 advanced an average of 17% and 26%, respectively, while the Nasdaq posted a 23% return six months after the fourth cut and an average 38% advance 12 months after.
What about sector returns, you ask? Which of the sectors in the S&P 500 do you think posted the strongest advance in the period following four successive rate cuts? I'll give you a couple of seconds to come up with your answer. (Insert "Jeopardy" theme song here.) Time's up. The answer is: What are Consumer Cyclicals?
Avg. % changes of underlying industries in existence since 1971.
The average advance for the 12 industries currently in the Consumer Cyclicals sector that date back to 1971 was 29% during the six months after the fourth cut in interest rates, followed by gains of 19% to 21% for the Health Care, Financials, and Transportation sectors. The weakest performances came from Energy, Utilities and Technology stocks, which rose an average of 8% to 18%. It is interesting to note that none of the 56 industries that participated in this study posted average returns that were negative. It seems a rising tide really did lift all boats.
As a result of this recent move by the Fed, and the projected effect it will have on our economy, S&P analysts recently upgraded several economically sensitive issues to 5-STAR status. First was Smurfit-Stone Container (SSCC
), going to 5-STARS from 3-STARS on the improving outlook for the economy. IndyMac Bancorp (NDE
) was again made a 5-STAR stock due to favorable fundamentals and a recent price drop. IBM Corp. (IBM
) is now a 5-STAR company, since it is exhibiting strong EPS momentum, and KLA-Tencor (KLAC
) was cherry-picked into the 5 STAR ranks since Tom Smith, S&P's Semiconductor Analyst, sees the company benefiting from the upturn projected for the economy and the industry.
These companies join the more than 80 companies in S&P's 5-STAR list, along with the five stocks that are in the Consumer Cyclicals sector: BJ's Wholesale (BJ
), Cendant Corp. (CD
), Clayton Homes (CMH
), Home Depot (HD
), and Scholastic Corp. (SCHL
). Stovall is Senior Sector Strategist for Standard & Poor's