It's a role reversal few expected: As China's GDP cools and Europe struggles with economic sclerosis, the burden of "global growth engine" has passed to the comparatively robust United States. The upshot is monetary tightening in the U.S. and loosening in the continent, with contrasting consequences for domestic and overseas stocks.
As the curtain lifts this week on the Yellen & Draghi Show, we pinpoint which stocks will occupy center stage. Not surprisingly, certain stocks that will benefit from rising rates in America and declining rates in Europe are among recent Warren Buffett buys.
In the latest sign of U.S. economic health, the Labor Department last Friday reported that American employers added 211,000 new hires in November, more than expected. That gives the green light to Fed Chairwoman Janet Yellen to put on the monetary brakes when the Fed meets Dec. 15 and 16.
At the same time, European Central Bank President Mario Draghi on Friday announced in a speech to Wall Street investors that he would pull out all the stops on stimulus to foster demand in a stagnant Europe.
Interest rate sensitive stocks to watch in the U.S. include major utilities that tend to decline during interest rate hikes, and banks that tend to rise.
Higher rates make borrowing more expensive for utilities, because they're capital-intensive businesses. Higher rates also prompt investors to seek other income-generating investments that provide a better risk/reward ratio than utility stocks.
Among the top utility stocks to watch (and probably avoid) this week include Dominion Resources (D - Get Report) , Excel Energy (XEL - Get Report) , American Electric Power (AEP - Get Report) , and Southern (SO - Get Report) . All are vulnerable to declines. As you'd expect, the Utilities Select Sector SPDR ETF (XLU - Get Report) is down 10.06% year to date.
Conversely, monetary tightening helps banks and financial services companies, largely because it reflects an improving economy that makes it easier for consumers to pay off their loans, which translates into lower loan-loss reserves.
Among the most promising banks to watch are JPMorgan Chase (JPM - Get Report) , Wells Fargo (WFC - Get Report) , Bank of America (BAC - Get Report) , U.S. Bancorp (USB - Get Report) , and Bank of New York Mellon (BK - Get Report) . WFC, BAC and USB are Berkshire Hathaway (BRK.A - Get Report) holdings. They belong to a group of well-positioned stocks that Buffett is now buying.
Meanwhile, Draghi's abandonment of politically unpopular austerity in favor of stimulus will chiefly benefit undervalued, Europe-based blue chips with a global portfolio of consumer products. Stocks to watch this week include consumer goods powerhouse Unilever (UL) and "Big Pharma" plays Sanofi SA (ADR) (SNY - Get Report) and Bayer (BAYRY) . Both UL and SNY are now part of Berkshire's portfolio.
Corporate earnings reports scheduled this week include H&R Block (HRB - Get Report) (Dec. 7,) AutoZone (AZO) , AeroVironment (AVAV - Get Report) , Costco (COST) (Dec. 8,) lululemon athletica (LULU - Get Report) (Dec. 9,) and Adobe Systems (ADBE - Get Report) (Dec. 10.)
Monday, Dec. 7
Gallup U.S. Consumer Spending Measure
Tuesday, Dec. 8
NFIB Small Business Optimism Index
Thursday, Dec. 10
EIA Natural Gas Report
Friday, Dec. 11
In the economic context described above, which stocks should you buy or sell? We suggest you take your cue from the greatest investor of all time, Warren Buffet. To learn what Buffett is buying and selling for 2016, download a copy of our free report.