When interest rates drop...

[TromboneAl]

Originally Posted by Mwsinron

Uncle Sam may need to see one of those debt consolidators....

He needs to see a shrink.

HELOC = Home equity line of credit

[d]

exactly!

[blanston]

Money Magazine has an anwser to my question:


NEW YORK (Money Magazine) -- The Federal Reserve decided Tuesday not to raise interest rates for the first time in more than two years, noting that economic growth had "moderated."

So which sectors are likely to do well now? A recent study from Citigroup looked at the past five runs of Fed rate hikes and examined how stocks performed in the 12 months following each final rate increase.

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One-year gain after Fed stops raising rates
Financials: + 24.7%
Health Care: + 23.4%
Consumer Staples: + 17.6%
S&P 500: + 9.9%



What they found: Classic defensive plays like pharmaceuticals, financials, utilities and consumer staples (which includes companies such as Coca-Cola and Procter & Gamble) have historically gained twice as much as the S&P 500 once the Fed stops raising rates.

[mathjak107]

Originally Posted by mathjak107

by the time they pause the gains will already be sucked out of the bond market and stocks will probley already have anticipated the pause and factored it in prior just like they did before may...in a short answer by the time the pause happens the big gains are already gone...you need to be in before in order to get the easy money

guess yesterdays action kind of confirms my theory

[brewer12345]

Originally Posted by blanston

What they found: Classic defensive plays like pharmaceuticals, financials, utilities and consumer staples (which includes companies such as Coca-Cola and Procter & Gamble) have historically gained twice as much as the S&P 500 once the Fed stops raising rates.

I think financials are the most attractive for this play. But a word of caution: choose carefully. There has been a lot of loose lending in the last few years and a pause/falling rate environment means that consumers are having some difficulties. Pick financials that do conservative lending, not credit card issuers, subprime mortgage guys, etc.

[blanston]

Well, yesterday I thought Money Magazine answered my question. They compare S&P to financials for 12 month average return after fed stops raising rates. But today they give the negative spin. They now suggest history of S&P is negative after Fed Stops. I think I will stop using Money Magazine as a source of info!

http://money.cnn.com/2006/08/09/mark...ause/index.htm

I still like financials.

[justin]

Originally Posted by blanston

I think I will stop using Money Magazine as a source of info!

Great advice to follow, especially if you like getting good investment returns and not falling prey to bad, wishy-washy, or misleading investment advice.

There's a problem with their conclusion that this particular sector sees a 24% return or the market overall sees a 10% return in the twelve months following a halt in the rate hikes. We don't really know if the fed has halted until those 12 months are up. Who knows if today is the first day of that 12 month period or if the fed will raise rates again in a few months or 6 or 8 or 10?

As a rule of thumb, the market's historical performance 12 months after a halt in rate hikes seems pretty useless. Inflation could spike or continue upwards in the coming months and require 1 or more additional rate hikes.

[blanston]

Justin,

I wish I had sa ved the link to another article. From Dumb Money- I think the columist was James Stewart. HIs research was interesting. He states there has never been a rate pause during a rate hiking cycle, only rate stops! He says the only time there have been rate pauses, have been during a downward cycle. Intersting if true.

[dmpi]

Originally Posted by blanston

Justin,

I wish I had sa ved the link to another article. From Dumb Money- I think the columist was James Stewart.* HIs research was interesting.* He states there has never been a rate pause during a rate hiking cycle, only rate stops! He says the only time there* have been rate pauses, have been during a downward cycle.* Intersting if true.

I would tend to agree with this. I predict the Fed will stand pat at least to the start of next year. The last couple of rate hikes have not fully worked itself through the system. The lag in the system is so large, it like trying to steer a supertanker. The fed needs to stand pat for a while and then see which way the boat is pointing.

[justin]

Originally Posted by blanston

Justin,

I wish I had sa ved the link to another article. From Dumb Money- I think the columist was James Stewart. HIs research was interesting. He states there has never been a rate pause during a rate hiking cycle, only rate stops! He says the only time there have been rate pauses, have been during a downward cycle. Intersting if true.

This is incorrect. July 1999 marked the start of our last rate hike cycle. Subsequent hikes occured in Sept 99, Dec 99, Mar 2000, Apr 2000, and June 2000. Most of those hikes had pauses in between them. The problem is figuring out (before it happens) when we are done raising rates, or whether we are just experiencing one of the many rate pauses. You can't know which until after the fact.