Major Wall Street firm picks stocks to buy when Fed cuts rates

Aug 22, 2024

Experts largely agree that the Federal Reserve will begin cutting interest rates next month, with futures prices pointing to a 67% probability of a 0.25-percentage-point move.

So what does that mean for stocks? Let’s look at what happened in previous Fed rate-cut campaigns.

In 12 of the Fed’s 14 rate cycles since 1929, the S&P 500 posted a positive return 12 months after the initial cuts, according to a Schwab report. The authors are Liz Ann Sonders, Schwab’s chief investment strategist, and Kevin Gordon, senior investment strategist.

Schwab Chief Investment Strategist Liz Ann Sonders, co-author of a report on the Fed and stocks.

<p>Jason Koerner/Getty Images</p>
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<div><figcaption>Schwab Chief Investment Strategist Liz Ann Sonders, co-author of a report on the Fed and stocks.</p>
<p>Jason Koerner/Getty Images</p>
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<p>The two exceptions occurred after the Fed began lowering rates in 2001 and in 2007. “They may feel uncomfortably recent, but neither economic environment resembles today’s,” the report said.</p>
<p>“The former happened amid the dot-com implosion and the latter was precipitated by the subprime mortgage crisis.”</p>
<h2>When defense beats offense</h2>
<p>Let’s have a look at how Fed rate changes affect market sectors.</p>
<p>“Defensive sectors — essential industries that tend to be more resistant to economic uncertainty, such as health care and utilities — generally perform well when interest rates are rising,” the commentary said.</p>
<p>“Conversely, cyclicals — sectors that benefit from an accelerating economy, such as consumer discretionary and industrials — have greater potential when rates drop,” the report said.</p>
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