Behind the Headlines
THIS MONTH: WHAT TO DO WHEN INTEREST RATES LEVEL OFF...SMART GUYS LIKE INTEL...CAN OIL KEEP GUSHING PROFITS?
(MONEY Magazine) – BIG PICTURE Get Ready for a Fed Pause
• WITH THE ECONOMY showing signs of a slowdown, chances are the Federal Reserve will stop raising interest rates soon, if it hasn't already. 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. 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. That's because consumers continue buying medicine, drinking soda and paying their electric bill, regardless of the state of the economy. Within that group, big drug companies look especially attractive, says Sam Stovall, chief investment strategist with Standard & Poor's Equity Research. Patent expiration fears and high-profile drug-safety scares have depressed drugmakers' stock prices. Meanwhile, the new Medicare prescription drug benefit is expected to hugely increase demand for their products. "There is the potential for profit growth combined with the interest in the sector's defensive characteristics," Stovall says. Brad Sorensen, a senior analyst with the Schwab Center for Investment Research, also expects the health-care sector to lead the pack once interest rates stop rising. But he says that if the economy continues to sink, it could be a mixed bag for financial stocks. Sorensen is recommending Citigroup (Ticker: c) and J.P. Morgan Chase (JPM), which he says should benefit from greater corporate loan demand and merger activity once rate hikes end. But investors may want to steer clear of regional banks with major exposure to home loans, since more consumers will likely default on their mortgages if the economy goes sour. "That concerns us," Sorensen says. --PAUL R. LA MONICA
One-year gain after the Fed stops raising rates
Financials 24.7% Health Care 23.4% Consumer staples 17.6% S&P 500 9.9%
NOTE: Based on average change in the 12 months after final rate increase, 1983-2000. SOURCE: Citigroup.
WHAT THEY'RE BUYING Value Investors Put Intel Inside Their Portfolios
• CHIPMAKER INTEL (INTC) is the worst performer in the Dow Jones industrial average this year. A combination of weaker demand for PCs and tougher competition has hurt sales and pushed Intel's market share below 80% for the first time in decades. The result: Earnings plummeted, and the company's shares have sunk 30% this year. But a turnaround could be coming. The company has reshuffled management and fired 1,000 workers to cut costs. Intel-enabled Apple Macintoshes are selling well. And in late July, the company unveiled a line of speedier chips that has gotten good reviews from the industry press. What's more, a number of respected value investors are buying in. Bill Nygren, for example, recently added a million Intel shares to his Oakmark (OAKMX) fund, bringing its stake to $160 million worth. Marty Whitman's Third Avenue Value fund (TAVFX) bought 2.5 million Intel shares, an investment of approximately $70 million, earlier this year. --STEPHEN GANDEL