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Traders see small caps and short-term bonds as big winners from likely Fed rate cut
(This is a wrap-up of the key money moving discussions on CNBC’s “Worldwide Exchange” exclusive for PRO subscribers. Worldwide Exchange airs at 5 a.m. ET each day.) Traders and investors are debating if the Federal Reserve will cut 25 basis points or 50 basis points when the decision comes at 2pm eastern time. The Jerome Powell press conference is also in focus with some market watchers saying the tone is possibly more important than the cut itself. Word of day: “Stagflation” Mark Smith of Wells Fargo Advisors said stagflation is the biggest risk to the soft landing as the Federal Reserve is expected to begin a rate cutting cycle. “That means prices aren’t going anywhere either up or down. It’s a killer to the economy and the markets.” Smith said on ” Worldwide Exchange .” Bullish on small caps Craig Johnson of Piper Sandler remains bullish on small-cap stocks titling his monthly note, “Russell Up Some Winners” — referring to the Russell 2000 index . “When the Fed cuts rates which is expected to happen today you tend to see equity markets work and it tends to be the more interest rate sensitive parts of the market that work well,” Johnson said. .RUT YTD mountain Russell 2000 year to date Opportunity in bonds Gurpreet Garewal of Goldman Sachs said shorter duration-bonds will be the biggest beneficiary of a Fed rate cutting cycle. “25 or 50 (basis points), we see a credible case for either. But it’s more important for investors to keep in mind the strategic path for policy here,” Garewal said. “The Fed is likely to adjust policy by 200 to 250 basis points over the coming year. Bringing that back to the investment implications … we think front end bond yields stand to benefit the 2 to 5 year US Treasurys.” Garewal also said this rate cut was part of a “normalization” cycle and shared research that yields on the 2-year fall 65 basis points on average after a first Fed cut. Worldwide Exchange picks Piper Sandler’s Johnson said he is bullish on regional banks as the rate cutting cycle begins and a number of financials hit all time highs, including Blackstone , Mastercard and Visa . His picks: Huntington Bancshares and Ameris Bancorp . “A lot of it comes down to the normalization of the yield curve that takes place. With the Fed starting the cut, the yield curve normalizes and Net Interest Margin spreads start to widen. That should benefit all the banks,” Johnson said. Chart of day Ferguson Enterprises is rallying after its earnings topped expectations. CEO Kevin Murphy said demand for plumbing and HVAC supplies from the building of data centers were a driver for the earnings beat.
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