Third Time Rate Cut Works Wonders For Wall Street: 5 Winners

Considering the ongoing trade issues and weak global growth this year, the Federal Reserve has trimmed rates for the third meeting in a row on Oct 30. History shows that such a dose of monetary easing helps the stock market extend gains.

Therefore, investors should cash in on this and invest in stocks that have the potential to grow in the near future.

Fed Cuts Rates for the Third Time

The Fed trimmed federal funds rate, which impacts cost of mortgages, credit cards and various other borrowings, for the third time this year. Rates were trimmed in order to help the U.S. economy bear with the protracted trade war without slipping into a recession. After all, parts of the economy, especially manufacturing, have been affected as the global economy slowed down on trade war concerns.

Business investments were also affected by the U.S.-China moves to raise tariffs on each others’ goods. The Fed acknowledged that business investments and exports remained “weak.” Fed officials believed that another “insurance cut” is much required to fend off worse outcomes, and hoped that it will boost business investments and consumer outlays.

The Fed’s rate-setting committee trimmed benchmark interest rates by a quarter of a percentage point to a target range of 1.5% to 1.75%. Fed Chairman Jerome Powell however said that the Fed will hold rates steady for the foreseeable future. Policy makers, in fact, removed the language that the Fed would “act as appropriate” to sustain economic expansion, something that was considered a sign of future rate cuts.

The Fed said that the current economic activity is “rising at a moderate rate,” labor market is “strong” and inflation is increasing at around the central bank’s target of 2%. Some may say that the economy expanded at an annual rate of 1.9% in the third quarter, below the year-ago level but not as sharp a decline as many market pundits and some Fed officials feared.

Nonetheless, the Fed’s trimming of benchmark interest rate for the third straight meeting bodes well for Wall Street.

S&P 500 Soars After Three 25-bp Cuts

According to data from LPL Financial, the broader S&P 500 tends to extend gains in the six-and-12 month periods following three consecutive interest rate cuts of a quarter percentage point each. Per LPL data, the S&P 500 jumped 10% in the six months and 20% in the 12 months following a trio of rate cuts by 25 basis points in the years 1975, 1996 and 1998.

LPL’s senior market strategist Ryan Detrick said that “we have seen periods of economic slowdowns that had three consecutive 25 basis point cuts, most recently in the mid- and late 1990s but the good news is the economy accelerated after the slowdowns and stocks did quite as well.”

By the way, the stock market is already doing pretty well. The S&P 500 has gained a solid 21% on a year-to-date basis. Other major bourses have climbed north as well. The Dow is up 16% so far this year, while the Nasdaq has surged almost 25% over the past 10 months.

5 Top Gainers

With the positive trend in mind, we have selected five solid stocks, especially from the S&P 500 cohort. These stocks have not only gained immensely this year, but are also poised to move north in the near term. At the same time, these stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a Zacks Investment Research

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Written By: Zacks Investment Research