“The time has come for policy to adjust,”
Those are the sweetest eight words that stock investors could have heard this morning as Jerome Powell delivered his annual speech at the Jackson Hole Economic Symposium.
First a Little History to Impress Your Friends With
In case you’re wondering what all the buzz is about in Jackson Hole, the annual meeting – hosted by the St. Louis Federal Reserve Bank – is an invite only meeting meant to bring diverse group of around 120 people together to discuss important policy matters.
Each year, the Symposium includes a speech from the acting Federal Reserve Chairman – Currently Jerome Powell – during which the Chairman discusses the Fed’s current policy, including a tip of the hand on where interest rates may go.
This year the Symposium falls ahead of the highly anticipated September meeting of the Central Bank and their decision on whether interest rates will move lower. So, it was a bigger deal than normal.
In case you’re wondering “Why” this event is held in Jackson Hole, check the bottom of this article for that fun fact.
Let’s Move on to the Eight Words
With those eight words – “The time has come for policy to adjust,” – Jerome Powell basically gave investors exactly what they’ve been waiting for, an interest rate cut.
No, he didn’t cut rates today, but the message in those eight words indicates that there’s no turning back for the Fed now and that interest rates will come down on September 18.
The market being the discounting machine that it is, investors and moving quickly to factor lower rates into prices of stocks today to get ahead of the September 18 rate drop.
The numbers speak for themselves…
- Regional Banks are 5.5% higher.
- Homebuilder Stocks are trading 4% higher.
- The Russell 2000 small cap index is trading 3% higher.
- The Nasdaq 100 Large Cap Technology index is only trading 0.9% higher.
Investors are picking up on the MASSIVE portfolio allocation that they started in Mid-July when heavy speculation of an interest rate cut started playing out in the market.
To give you an idea of how powerful this migration of money in the market is, the Regional Bank ETF (KRE) rallied 20% in fourteen days. That’s the biggest move that the group has made since December 2023 when investors first started to speculate on an interest rate cut.
Unfortunately, each rally before today’s has been dashed by Jerome Powell walking back on his subtle hints that rates would start coming down.
That’s not the case today. He’s all in.
If the Fed doesn’t drop rates in September they will lose all credibility and the only thing you’ll want to hold in an account is gold and cash. We’ll cover that if we get there.
So, What Are the Three Stocks that Love These Eight Words?
No surprise here, we start with the smaller regional banks.
Fifth Third Bank (FITB)
This is one of the “super regionals” and a larger name in the banking industry, but the stock is set for a technical breakout on the interest rate forecast.
The bank has a heavy concentration in the commercial loan and home financing lines of business, both of which should get a boost as interest rates start lowering.
Fifth Third’s management has been holding their outlook close to the chest during their earnings calls this year. In April the company’s outlook for revenue was raised for 2024 by a small 1%.
The “Under Promise & Outperform” model has been one that has been part of Fifth Thirds playbook for years, which is a great setup for the bank to finish 2024 on a strong note.
Earnings will approach a month to the day after the Fed lowers rates in September (October 18), which should give the bank an opportunity to issue fresh guidance with confidence of the Fed’s moves through the end of the year.
The stock is breaking above a key price level at $42.50, which will trigger another round of buying as investors are looking to get into the regional ahead of the interest rate cut.
That break above $42.50 is likely to target an 18% rally through the end of the year with the stock heading towards $50.
Keycorp (KEY)
Another larger regional bank, Keycorp shares much of the same outlook as Fifth Third.
The technical outlook for Key Corp shares just turned bullish as the 50-day moving average of the stock is now in an uptrend. In addition, the 200-day moving average below the 50 is shifting into a bullish trend as well.
That shift in the technicals tells us that buyers are starting to move the stock into a positive. Momentum trend.
Sentiment towards Key Corp has grown more pessimistic over the last two quarters.
Thirteen analysts have lowered their earnings expectations for Key Corp with only one analyst seeing improvements in the stock.
That type of sentiment towards the stock indicates that shares are far from their potential valuation, suggesting that only one or two positive earnings reports will drive this stock higher as investors improve their outlook.
The stock is preparing to break through the $17.50 price which has been a short-term resistance level. A move above that price will accelerate that positive momentum.
Investors should see lower rates result in a targeted 30% rally to $22.50.
Keep it Simple with the SPDR Regional Banking ETF (KRE)
The Regional Bank ETF combines 68 different companies into one investment.
The benefit of that in this case is that you get diversification by buying one share, but of course, you still get the benefit of being in one of the sectors that’s going to benefit the most from lower interest rates.
In July, the KRE rallied more than 30% as investors started to believe that interest rate cuts were on the horizon.
Today, the shares are trading almost 500% as Jerome Powell confirmed that those beliefs are going to come true in September.
The magnitude of the September cut will potentially have more of an effect here as a 0.50% cut to rates instead of 0.25% would put even more bullish pressure on these stock into the end of the year.
Believe it or not, right now, investors should hope for a smaller cut.
These stocks would get an extra boost of buying power on a deeper cut to interest rates, but it comes with a very real risk. That risk is that the Fed is now more worried about a recession instead of just normalizing the interest rate environment.
The Regional Bank ETF is positioned to make a new 52-week high as it exceeds $60 which will draw even more bulls into the regional bank trade as we head into October.
Here’s Your Fun Fact on Why the Symposium is in Jackson Hole
Thank Paul Volker.
The Kansas City Fed hosts the annual conference, but who wants to go to KC to talk about anything? My apologies to you readers from Kansas City.
In 1980, the Kansas City Fed was planning the Symposium and wanted to make sure that one key player was in attendance, Paul Volker.
Coincidentally, Volker’s name has been mentioned more often than normal over the last two years because his 1980’s battle with inflation was as entrenched as Jerome Powell’s.
Continuing, Paul Volker was an avid fly fisher and there was one way to “lure” him to the conference… have it in the middle of some of the best fly fishing in the country.
There you have it. Impress your friends at a party this weekend with that knowledge.
