Here is the Goldman Sachs guide to beat the market if the Fed reduces prices
Pedestrians walk past the New York Stock Exchange before the closing clock in New York.
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Goldman Sachs encourages its customers to prepare for the possibility of the Federal Reserve lowering interest rates later this year and adjusting its stock holdings.
The investment bank's top stock strategists recommended defensive healthcare and consumer founder as two key areas that typically exceeded the broad market after the start of the cutting cycles.
"If the Fed lowers prices, S & P 500 usually picks up afterwards, with healthcare and consumer foes that surpass, and information technology runs smoothly," wrote David Kostin, chief US equity strategist at Goldman Sachs. "The communications services sector has generated the best relative returns and success rates over the next 3 months (+4 pp, 1[ads1]00%), but has underperformed over a 12-month horizon."
Investors have grown confident in recent weeks that the Fed will cut interest rates by the end of the year, pushed by weaker economic data, US-China trade tensions, and anemic inflation. The S & P 500 increased by 4.4% last year and managed its best week since November during the speed-saving optimism.
Investors tracked by the CME group's FedWatch tool believes the central bank is more likely than not to cut prices at least once in July. The Fed will meet next week and again July 30 to July 31.
Goldman also recommended certain investment themes such as momentum deals, which are games that stocks are currently in favor will continue to surpass. Momentum investors believe that upward trends can persist for longer periods, despite high valuations and steep price tags. Kostin also recommended stocks that trade quieter than others, and encourage customers to look for low-volatility securities.
In addition to two exceptional price fluctuations in 1998 and 2001, Kostin's analysis of the last 35 years showed that torque sales have generated a median 13% return over the 12 months following a price reduction.
"Few preforms exist over the last 30 years where futures discounted a rate cut 30 days before a scheduled FOMC meeting, but the Fed didn't cut," Kostin added.
Lighter loan costs often give companies with weaker balances an advantage over those with less influence, Goldman Sachs said. Although companies with strong balance sheets have surpassed their weak balance sheet engines by 28 percentage points since the beginning of 2017, Goldman said it could begin to change if Fed Chair Jerome Powell and his colleagues cut overnight.
"We proposed to own strong balance stocks that the Fed consistently tightened policy in 2017 and 2018. However, Fed's tough pivot this year, and the almost unmatched valuation premium of strong balance objects led us to adopt a more neutral stance in February," Wrote Kostin. "Increased corporate leverage and slower economic growth remain long-term tailwinds, but a potential interest rate cut should be a wind blow to further outperform strong balances."
