These stocks can increase most when the Fed cuts interest rates three times and pauses
A trader is laughing in front of that closing clock on the floor of the New York Stock Exchange (NYSE) on February 1, 2019 in New York City.
Johannes Eisele | AFP | Getty Images
There appears to be a stage for stocks to shine after the Federal Reserve's third interest rate cut and the signal to stop from now. And certain groups of stocks will benefit most, if history is any guide.
The Fed lowered interest rates for the third time this year on Wednesday, indicating that it will make it easier. Powell made clear at the press conference that the current monetary stance "is likely to remain appropriate."
The three-and-done approach was used on two occasions in history ̵[ads1]1; between 1995 and 1996 and 1998. Alan Greenspan-led the Fed cut interest rates by a total of 75 basis points, in both periods to fight an economic downturn and successfully extend the extension.
The Fed's episodes of insurance relief in the 1990s managed to drive the S&P 500 22% higher on average a year after the third cut, CNBC analysis found. The move was particularly favorable for cyclical stocks, including tech, energy and industry, as investors focused on financially sensitive pockets in the market following interest rate cuts in the Fed.
CNBC, using hedge fund analysis tool Kensho, found information technology turned out to be the best-performing sector after the central bank cut interest rates three times and paused, increasing 66% in the year after third cut on average. Energy and industrial equities jumped on average about 24% over the same period.
It is not surprising that cyclical stocks have historically had the biggest promise from the Fed's interest rate cut. As monetary easing has been developed to move the economy, investors tend to move toward stocks that are traditionally correlated with economic growth.
To be sure, the tech sector's amazing pop happened in the 1990s when there was a rapid rise in US technical stock valuations at the height of the dotcom bubble. So the Fed set should have less impact on the group this time.
