The S&P 500 and Nasdaq continued their record gains this week following weaker-than-expected Consumer Price Index data on Wednesday morning. The Fed’s rate cut is likely to be positive for the stock market as a whole, but some stocks in the CNBC Investing Club portfolio, from housing stocks to autos to biotech, could really rise. Let’s connect the dots here. The Consumer Price Index for May was released just hours before the opening bell on Wall Street and before the Fed concluded its two-day policy meeting in June. The unchanged CPI readings for the month continued for several months, indicating that inflation will not be easily overcome. In a press conference after the meeting, Fed Chairman Jerome Powell emphasized that more progress is still needed to bring down the inflation rate before making the first rate cut. The Fed ultimately left interest rates unchanged this time around. While central banks look to inflation to determine the appropriate level of borrowing costs, it is important to consider how each of these factors — inflation and interest rates — affect consumer purchasing power. Inflation is the rate at which prices rise over time. Interest rates are about the cost of money. While inflation tells us what’s happening with list prices, interest rates determine whether borrowers can buy big-ticket items like cars and homes that typically require some sort of financing arrangement. Housing Stanley Black & Decker is likely to be a big beneficiary of the Fed’s interest rate cuts because of its ties to the housing market. This isn’t because lower interest rates have made tools much more affordable (power tools typically don’t require financing), but because of what drives consumers to go out and buy these tools: the big purchase that stimulates demand: housing. Cheaper mortgages and lower prices boost home buying, which means more homebuilding and more business for Stanley’s specialty. More homeowners also means more potential buyers for the tools needed to undertake home repair and remodeling projects. This homebuilding movement should also provide a gradual boost to companies like Best Buy and off-price retailer TJX through their HomeGoods and HomeSense brands. After all, if you buy a new home, you’re going to need to furnish it. That’s TJX. They will also likely consider upgrading their appliances and electronics. That’s Best Buy. Both retailers can also predict that people will spend more as they borrow less for larger purchases (lower interest rates) and have more free money to spend. Banks When it comes to financing, you need to consider the banks that are actually lending. But the benefits of low interest rates are not clear. On the one hand, lower interest rates mean that banks like Wells Fargo make less money on the money they lend. But on the other hand, as borrowing demand increases, Wells Fargo may make more loans. We’ll have to see how that is offset in terms of interest income, but we think that increased borrowing demand and more robust economic activity bodes well for banks. After all, a healthier economic environment with capital continuing to flow is a good thing. Our other financial stock, Morgan Stanley, was hit hard by rising interest rates as many clients moved their cash around in search of higher yields. As interest rates fall, we should see some reversal of those trends. Morgan Stanley should also benefit from robust investment banking as low interest rates boost IPO underwriting demand and merger and acquisition fees. Biotech Danaher should also benefit somewhat as lower interest rates improve funding trends for biotech companies. The collapse of Silicon Valley Bank, plus a pullback in biotech funding, has dampened demand for Danaher’s biologics portfolio. SVB was a major source of funding for biotech companies. So as venture funding returns and more biotech companies seek to go public, demand for biologics should also increase. Automotive Another winner in the portfolio will be Ford. For most people, buying a car means borrowing money at a set interest rate and paying it off over several years. As with homes, low interest rates make monthly payments much more manageable, which should increase affordability and demand. Ford has exited loss-making all-electric vehicles and is putting resources into higher-margin hybrids. Monthly sales numbers support the wisdom of this strategy. Any help in making cars more affordable on the interest rate side could further accelerate a business already moving in the right direction. Enterprise On the enterprise side, Palo Alto Networks stands out. The cybersecurity giant said in a recent quarter that its customers (both large and small) are asking for adjustments to payment terms due to rising financing costs. While it’s not a demand issue, we’ll definitely see a change in the mood, pace and deal size of deals as companies get comfortable with lower borrowing costs. Salesforce, which has emphasized more cautious deal activity, may not benefit as much from lower interest rates. We’re still trying to figure out how much of the headwind is due to lending rates or how much is due to customers realizing they might be able to achieve similar results by leveraging generative artificial intelligence tools from the likes of Salesforce rival Microsoft. (See here for a complete list of Jim Cramer’s Charitable Trust stocks.) As a subscriber to Jim Cramer’s CNBC Investment Club, you’ll receive trade alerts before Jim makes any trades. 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Stanley Black & Decker power drills are on sale at a Home Depot store in Colma, California.
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of S&P 500 and Nasdaq Stocks have been riding a record rally this week after the Consumer Price Index came in weaker than expected on Wednesday morning. While the Fed’s rate cut is likely to be a boon for the stock market as a whole, several stocks in the CNBC Investing Club portfolio, from housing to autos to biotech, are poised for big gains.
