U.S. financial stocks are a good bet ahead of a likely Federal Reserve rate cut, according to BTIG.
“Our overweight sectors tend to be outperformers in the months leading up to a rate cut,” BTIG strategist Julian Emanuel said in a phone interview. His firm expects two Fed cuts in 2019.
In addition to financials, Emanuel is recommending health-care companies, which he sees as too beaten-down by the prospect of further regulation that’s unlikely to pass in a dysfunctional Washington, and energy stocks that have been hurt in the past few weeks by oil’s declines on economic concerns.
Financial shares are poised to do well, Emanuel says, because President Donald Trump is likely to try to bolster the economy as the 2020 presidential election nears. At the same time, the Fed “is acting as if the trade war is likely to be a protracted situation. You throw all of that together, and to us that’s a really good reason to own financials here, which have been held back by a flatter yield curve.”
Emanuel is keeping his year-end target of 3,000 on the S&P 500. While the broader S&P 500 is up 13% year-to-date to 2,826.15 as of Wednesday’s close, there’s significant dispersion. Real estate and information technology have led the way with advances of almost 20%, while financials are in the middle of the pack with a 13% gain. Emanuel’s other preferred sectors are the bottom of the heap, with energy up 3.8% and health care rising just 3.2%.
Sectors like utilities and consumer staples, on the other hand, might be vulnerable to pullbacks. Emanuel said people have “hidden” in them as yields plunged. He recommends collar-type strategies, which are option trades that limit large losses but also cap big gains, in those industry groups.
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