Though 2024’s rate cut prospects remain somewhat uncertain, with Federal Reserve officials flip-flopping between “higher for longer” and planned drawdowns, preparing your portfolio for the inevitability is still a useful exercise. Remember that investors waiting on the sidelines and keeping cash in expectation of a massive market crash over the past year missed out on more than 30% gains in the S&P 500. Timing the market isn’t always an advisable approach, but when building long positions, it’s generally better to be too early than too late.
To that end, these stocks — representing very different market segments and even asset classes — stand out as the top picks to buy on a Fed rate cut.
Small-Caps: Steelcase (SCS)
Yesterday, I covered small-cap and penny stocks’ unique positioning today. The “best” stocks with the greatest operational potential and financial management stayed afloat, even if just barely. That makes these small-cap stocks generally great buys today at their low valuations, as the wider small-cap sector hasn’t kept pace with large-caps in the S&P 500. But combine small-cap stock potential in a rate-cut climate, and the potential explodes, one strategic director at Fidelity said. “Small caps have historically benefited more than large caps from the first rate cut of a cycle,“ making this pre-cut uncertainty period the perfect time to build a position.
While plenty of value-centric small-cap stocks stand out, I like Steelcase’s (NYSE:SCS) prospects. First, the company’s ex-dividend date is April 1st, so buying this stock today, even before rate cuts, offers an income opportunity as we await the wider market movement. Steelcase’s next dividend, payable on April 15th, will be $0.10 per share for a 3.18% total yield. While not spectacular, it does speak to Steelcase’s strong financial management that it continues offering a modest dividend even amid economic uncertainty.
Steelcase’s last earnings report was good but not great. Earnings expanded 127% for 2023, but since the prior year was tough on all sides, the stock price didn’t react as strongly as some had hoped. Likewise, sales remained steady and climbed slightly for the fourth quarter, and management projects a strong 2025 on the heels of rapid order increases within the first few weeks of 2024’s start. Steelcase trades at just 0.45x sales and 20x earnings, making the small-cap value stock a top play for Fed rate cuts.
Cyclical Stocks: Lowe’s Companies (LOW)
Cyclical stocks, particularly consumer discretionary stocks, tend to perform well when after rates drop. Couple rate cuts with renewed consumer sentiment that’s climbing daily and consumer discretionary stocks are set to see rapid earnings expansion as conditions normalize (or get as close to normal as can be expected). For this reason — and a few others — I like Lowe’s Companies (NYSE:LOW) as a top consumer discretionary stock to buy for Fed rate cuts. Bill Ackman may disagree after he axed his Lowe’s position and locked down more than $1 billion in profits. But I think Lowe’s bull run is just beginning.
While DIY home improvement rates have improved mightily over the past few months, as I’ve written previously, the real moneymaker for Lowe’s and competitors is residential real estate construction. Housing supply and related metrics have whip-sawed over the past few years as supply chain crunches and monetary policy effects wreaked havoc on the sector. However, residential new starts are finally ticking upward, hitting 1.5 million in February. Rate cuts, of course, will finally bring mortgage rates down and spur renewed homebuyer prospects, benefiting residential construction and Lowe’s in one fell swoop. Lowe’s trades at a modest 19x earnings today. Combine the stat with stabilizing quarterly sales, and the company is a hot stock to buy for Fed rate cuts.
Junk Bonds: iShares 0-5 Year High Yield Corporate Bond ETF (SHYG)
Expense ratio: 0.30%, or $30 annually on a $10,000 investment
Okay, so iShares 0-5 Year High Yield Corporate Bond ETF (NYSEARCA:SHYG) isn’t a standard stock, but that doesn’t diminish its potential for success during Fed rate cuts while offering patient investors substantial income in the interim. Without going into the granular details of how bond ETFs work, know that rate cuts mean per-share pricing increases while rates go down.
That is less the case for short-term bond ETFs like SHYG, but that’s a good thing. You’re prepared for a boost, but in the meantime, the per-share price stays remarkably stable with less volatility compared to long-dated bond ETFs like the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT). As evidence, SHYG’s beta is just 0.60 compared to TLT’s insane 2.19 stat. While TLT has a place in some portfolios, early investors suffered as the long-dated ETF dropped 11% over the past year compared to SHYG’s 4% gain net of dividends; this growth metric is based on share pricing exclusively.
But, speaking of dividends, SHYG’s current 30-day SEC yield is 7.46% — far greater than even the best high-yield savings account. And with a portfolio of junk bonds from companies like American Airlines (NASDAQ:AAL), Uber Technologies (NYSE:UBER) and Staples, it’s likely more sustainable than the “junk bond” nomenclature suggests.
On the date of publication, Jeremy Flint held no positions (directly or indirectly) in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.