Best Sectors for a Rate Ease

If/when the Fed cuts interest rates next week, will you be positioned in the right sectors?

Brett Fromson: Winning in a Post-Bubble Market

Jim Cramer: How to Solve Your Portfolio's Janus Problem

Gary B. Smith: Quit Waiting for the Big Blowoff

Fund Junkie: Is Buy and Hold Dead? Or Just the Wrong Question?

John Rubino: Hot-Money Havens for the Post-Bear Market

David Donnelly: Here's What Not to Do

Fund Junkie: Time to Say Goodbye to That Struggling Tech Fund?

Jim Cramer: A 'Do-It-Yourself' Attitude Can Be Perilous

Best Sectors For a Rate Ease

While the expected rate-cut action by the Federal Reserve next week could ease the market malaise generally ( chatter now has Fed funds rate getting sliced by 75 basis points ), rate cuts tend to play favorites among sectors. To figure out which ones would profit most, we looked at historical post-rate cut market action tracked by the ISI Group.

The rate-cut dark horse? Footwear makers Nike (NKE Quote) and Reebok (RBK Quote). These stocks, which make up the Standard & Poor's footwear group, consistently outperform other S&P industries when the Fed starts lowering interest rates, according to ISI data.

These tables show which industries did best when the Fed eased monetary policy during 1989 and 1995-1996:

Which Sectors Perform Best After Rate Eases, and When?
Return after first ease (average for periods after Jun '89, Jul '95 eases)
	3 months later
Footwear Health Care Air Freight	19.2% 16.7 14.4
	6 months later
Electronics, Defense Major Pharmaceuticals Nondurable Household Products	30.3 26.1 23.5
	1 year later
Footwear Nonalcoholic Beverages Oil & Gas (Drilling & Equipment)	58.5 47.1 38.1
Return after second ease (average for periods after July '89, December '95 eases)
	3 months later
Footwear Electronics, Defense Airlines	25.5% 17.9 16.5
	6 months later
Footwear Gold & Precious Metals Mining Nonalcoholic Beverages	34.7 22.8 18.6
	1 year later
Footwear Semiconductors Oil & Gas (Drilling & Equipment)	58.0 56.6 42.9
Return after third ease (average for periods after Jul '89, Jan '96 eases)
	3 months later
Footwear Airlines Oil & Gas (Drilling & Equipment)	27.3% 18.3 15.2
	6 months later
Footwear Oil & Gas (Exploration & Production) Nonalcoholic Beverages	30.5 20.9 19.2
	1 year later
Semiconductors Footwear Oil & Gas (Drilling & Equipment)	77.7 60.6 48.3
Source: ISI Group

Run with It

Why footwear? With only two stocks, it might just be coincidence. Indeed, based on their performance since the start of the most recent spate of cuts, it sure looks that way. Nike is down about 31% since Jan. 3. Reebok is holding up better, down 1.9% since then, compared with a 10.6% loss on the S&P 500 .

However, John Shanley, a footwear analyst at Wells Fargo Van Kasper, thinks there is a footwear/rate-cut connection. He explains that footwear is a capital intensive business and that these companies have "lower cost structures as interest rates come down," thus boosting earnings.

Shanley expects the rate magic to work this go-around, too, partly because these companies are enjoying strong demand right now, he says. Still, while he rates Reebok a buy, he rates Nike market perform. (His firm has not done recent underwriting for either company.) Why only a market perform for Nike? Shanley says his current rating is based on short-term prospects for the stock, while he feels stronger about it longer term.

Semi Season

Semiconductors are another ease-era standout. Chuck Hill, director of research at First Call/Thomson Financial, says semiconductor bottoms are marked by huge overcapacity that kills pricing. But "then when the capacity is worked through and the upturn comes, these guys are ready to go. It's not immediate ... but once they work off [the capacity] these companies are off to the races," Hill says. That theory would arguably require rate eases to spur the economy -- not a sure thing. Still, since Fed Chairman Alan Greenspan starting cutting in January, the Philadelphia Stock Exchange Semiconductor Index is up 7.3%.

Oil and Gas

Oil and gas companies also hit the ISI charts, but why is less clear. "The economy has some impact but not as much as the oil and gas exploration business itself. The cycle is much longer in the oil business," says Hill. "Natural gas looks like it will have a long cycle. We just do not have enough capacity in natural gas" and that's what's driving prices up there lately, separate and apart from rates, Hill adds.