On February 1, 2024, the Feds decided to go steady with the interest rates. The first meeting of 2024 didn’t see a rate cut, which currently remains steady at 5.25% to 5.50%.
Even though Jerome Powell, the Federal Reserve Chairman, floated the prospect of rate cuts, it isn’t expected to happen in March.
Trading.biz analyst Rahul Nambiampurath believes that the impact of the steady rates followed by the expectations of a year-end rate cut, might impact the housing, technology, and consumer discretionary space.
The last available inflation rate, reported for December 2023, was 3.4%. As it closes in on the final target of 2%, the consumer confidence levels surrounding the rate cuts in February 2024 were high. However, Rahul identified an interesting change of events, which explains the steady rates.
“The December 2023 inflation was at least 10% higher than the November 2023 levels. A hasty rate cut wasn’t on the cards as the Fed is seeing progress but not a rapid one”, mentions Rahul.
Which sectors and themes will be impacted and how?
The themes are clear. The housing space has been showing signs of improvement over the past year or so, with the likes of Zillow Group charting 26.37 percent gains, year-on-year. This growth can be attributed to the increasing consumer confidence and shows that a rate cut is on the cards. Rate cuts lower the borrowing rates, positively impacting the housing space.
As for the technology space, growth stocks like Microsoft (MSFT) and Apple (AAPL) have been trading in the high, positive territory over the past 12 months. Do note that investment in these high-growth stocks increases when the borrowing costs are steady or even low.
Yet, that might just be a lagging indicator. Let us focus on something that could mean a possible interest rate cut in the coming months.
Why follow the consumer discretionary space?
The consumer discretionary space, which aligns with the non-essential requirements of people, starts seeing growth closer to rate cut periods. Rate cuts lower the borrowing rates, ensuring a higher disposable income, which is like an elixir for the consumer discretionary space.
Let us see how the top ones have performed, month-on-month:
- The Home Depot, Inc (HD): Up by 2.28%
- Nike, Inc (NKE): Down by 4.71%
- Starbucks Corporation (SBUX): Down by 0.68%
- Amazon.com, Inc. (AMZN): Up by 3.51%
Do note that the signals are mixed, aligning with the steady rates. Let us take a closer look at the daily AMZN chart to predict a possible rate cut.
As you can see, AMZN tried to break out of the ascending wedge, but the Fed announcement of a steady rate pushed it back. However, if the RSI keeps making higher highs and the upper trendline, which aligns with the $163 level, is breached again, we can expect AMZN to move towards $180 by the year-end. If that happens, we can see a rate cut happening.
But then, tracking the performance of the consumer discretionary sector alone wouldn’t be sufficient. Aspects like broader economic data, employment data, and more also need to be looked at.
