Introduction

When the Federal Reserve makes its policy decision Wednesday afternoon, certain stocks have the most at stake because of their historical correlation to interest rate moves. Traders are assuming the Fed will raise its benchmark rate for the 11th time in this cycle, but what they don’t know is what Fed Chief Jerome Powell will say about the central bank’s future policy at his press conference following the decision. There are two likely scenarios:

Scenario 1: Fed Raises Rates

The Fed raises its fed funds rate, but Powell signals the inflation fight is far from over. Market rates are likely to shoot higher, benefiting a select group of stocks highlighted below, while causing the broader market to decline. Heading into Wednesday, certain investors are saying this scenario is the most likely, especially given the recent rally in stock prices. “Investors should beware of becoming too optimistic that today will mark the end of the rate-hiking cycle,” wrote Solita Marcelli, chief investment officer Americas for UBS Global Wealth Management. “The Federal Reserve will remain eager to stress its inflation-fighting credentials.”

To find the winners if rates spike on the Fed, HaberTusba PRO looked at the Russell 1000 stocks with the highest correlation to rising rates over the last 50 days. In order to do this, they used the short-term bond fund, the iShares 1-3 Year Treasury Bond ETF, as their proxy for the bond market. By analyzing the stocks with the highest negative correlation to bond prices, they identified the stocks that could benefit if rates increase. Notably, insurer Primerica is at the top of the list. If rates move higher on the Fed, Primerica can charge higher rates for its insurance and financial products.

Scenario 2: Fed Signals End of Rate Hikes

The Fed raises rates and takes a wait-and-see approach, hinting that it could be done hiking for this cycle. Market rates are likely to decline and the broader stock market is likely to rally, with a certain group of stocks highlighted below gaining the most. This group is a mix of risky stocks that would benefit from a market rally induced by falling rates. There are also some direct beneficiaries, like fintech PayPal, which would be helped by lower interest rates boosting transactions and lowering what it has to charge consumers.

Conclusion

The upcoming Federal Reserve policy decision will have significant implications for certain stocks. Depending on the Fed’s actions and Powell’s statements, different groups of stocks will be affected. Investors should carefully consider the potential outcomes and the historical correlation between stocks and interest rate moves to make informed investment decisions.