Markets & Finance

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:

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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