Wednesday, August 09, 2006

Benefiting from a pause

NEW YORK (Money Magazine) -- The Federal Reserve decided Tuesday not to raise interest rates for the first time in more than two years, noting that economic growth had "moderated."

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.

One-year gain after Fed stops raising rates
Financials: + 24.7%
Health Care: + 23.4%
Consumer Staples: + 17.6%
S&P 500: + 9.9%

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[8/22/06] The above seems to contradict this fact ""Since the Fed's inception in 1913, the average historical DJIA return after the Fed's terminal interest-rate hike is negative (i.e., the DJIA goes down, not up), 4, 6, 8, 10 and 12 months thereafter."

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