Stock markets usually climb when interest rates are cut because many businesses respond to rate declines by borrowing more in order to expand.
This trend causes companies to hire more employees, driving consumer consumption, the main driver of the U.S. economy, higher. Additionally, consumers tend to borrow more when rates go down, allowing them to make more large purchases. As a result, the firms that sell the most expensive items, such as vehicles and homes, tend to be most significantly affected by rate cuts.
Also noteworthy is that, over the last two years, the quick pace of rate hikes caused the balance sheets of many banks that held large amounts of bonds to be greatly undermined. That’s because the value of bonds drops when rates increase. Consequently, the rate cuts that seem imminent will help many banks become stronger in the eyes of investors by lifting the value of their bonds.
Here are three stocks to buy before interest rate cuts.
Enphase Energy (ENPH)
Enphase (NASDAQ:ENPH) specializes in making solar inverters that are used to convert sunlight into electricity. Enphase, like many solar firms, have reported significantly lower revenue over the last year. One of the key culprits behind their slump has been the high rates which make it much more expensive for consumers and businesses to borrow money in order to install solar panels.
Indeed, on the company’s fourth-quarter earnings call, held on Feb. 6, CEO Badri Kothandaraman, noted that California solar installers are still being meaningfully hurt by high rates. Moreover, Kothandaraman noted that another one of the company key businesses — selling batteries used for energy storage — has also been badly hindered by high rates.
And the CEO explicitly said that the firm expects the demand for inverters to climb in the U.S. if rates drop by 0.5 to one percentage points. And in California, he anticipates that the demand for both batteries and inverters would climb in such a scenario.
Given these points, ENPH is definitely one of the best stocks to buy before interest rate cuts.
Bank of America (BAC)
Bank of America (NYSE:BAC) is the most prominent bank whose balance sheet has taken a big hit as a result of high rates. Indeed, as of the end of the third quarter of 2023, “the unrealized losses in the bank’s held-to-maturity assets climbed to $131.6 billion….from $105.8 billion. As of the end of the year, however, these losses fell back down to $102 billion, driven by the interest rate drops that have already occurred in anticipation of the Fed’s.
That’s because most of those assets consist “of low-yielding mortgage securities and government debt,” and the value of those instruments rise as rates fall. As a result, the future rate cuts will definitely greatly enhance BAC’s balance sheet.
And as BAC’s balance sheet improves further, the valuation of its shares is likely to climb a great deal.
Currently, BAC has a price/book ratio of one, well below JPMorgan’s equivalent ratio of 1.68. As rates drop, that valuation gap will very likely narrow tremendously.
According to Cox Automotive Chief Economist Jonathan Smoke, “2024 will be the best year for consumers to buy a new car since before the pandemic.”
One of the reasons for the improvement is the probable decline of interest rates later this year, the economist explained. Indeed, lower rates make buying vehicles much more affordable for the vast majority of consumers who take out loans in order to purchase them.
And the automaker may already be benefiting from lower rates, as its cash flow from operating activities soared to $2.5 billion last quarter from $1.2 billion during the same period a year earlier.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.