The S & P 500 and Nasdaq extended their record rallies this week following cooler-than-expected consumer inflation data Wednesday morning. While Fed rate cuts would likely benefit the overall stock market, several names in the CNBC Investing Club portfolio — from housing plays to autos to biotech — could really get a boost. Connecting the dots here: The consumer price index for May was released before the opening bell on Wall Street — just hours before the Fed concluded its two-day June policy meeting. The CPI’s month-over-month unchanged reading followed several months, which showed that inflation was not going to be vanquished so easily. During his post-meeting press conference, Fed Chairman Jerome Powell highlighted that further progress still needed to be made in lowering the rate of inflation before we see our first rate cut. The Fed ended up keeping rates steady again this time around. While central bankers look at inflation to help determine the appropriate level of borrowing costs, it’s important to consider how each of these factors — inflation and rates — impact consumer buying power. Inflation is the rate of price increases over time. Interest rates are all about the cost of money. Inflation tells you what’s happening in terms of list prices, whereas interest rates determine whether borrowers can afford higher-priced things like cars and homes that usually require some kind of financing agreement. Housing We see Stanley Black & Decker as a major beneficiary of Fed rate cuts due to its link to the housing market. That’s not because lower rates make tools so much more affordable (you generally don’t need to finance a power tool) but because of what prompts consumers to go out and buy these tools. It’s the big purchase, the home, that catalyzes demand. Cheaper mortgages and lower prices will boost homebuying. That means more homebuilding, which would bring Stanley more business on the professional side. More homeowners, too, mean more potential buyers of the kind of tools needed to fix things around the house and embark on renovation projects. That home formation dynamic should also provide incremental boosts to companies like Best Buy and off-price retailer TJX , through its HomeGoods and HomeSense brands. After all, once you buy that new home, you’re likely going to need to furnish it. That’s TJX. You’re also likely going to look at home electronics and appliance upgrades. That’s Best Buy. Both of the retailers could also see people willing to spend more because they’re spending less to borrow on those larger purchases (less interest), leaving more discretionary dollars in their pockets. Banks Talking about financing, we have to consider the banks that actually do the lending. However, the benefits of lower rates are less clear. On the one hand, lower rates mean a bank like Wells Fargo makes less money on the money it lends. But, on the other hand, Wells Fargo may well lend more as demand for borrowing increases. While we will have to see how it nets out in terms of interest income, we think the increased borrowing demand and more robust economic activity bodes well for the banks. Ultimately, a healthier economic environment with money continuously flowing is a good thing. Our other financial stock, Morgan Stanley has been hurt by higher rates as many clients shifted cash around in search of higher yields. As rates move lower, we should see some of that dynamic reverse. Morgan Stanley also has a robust investment banking business that would be helped by lower rates boosting demand for the underwriting of initial public offerings (IPO) and fees from mergers and acquisitions. Biotech Danaher should also see some benefit as lower rates lead to improved funding dynamics for biotech companies. A pullback in biotech funding on top of the collapse of Silicon Valley Bank hampered demand for Danaher’s biologics portfolio. SVB was a major source of capital for biotech companies. So, as venture funding comes back and more biotech companies look to go public, we should see biologics demand increase as well. Autos Another portfolio winner would be Ford . For most folks, buying a car means borrowing money at a given rate and paying it back over a few years. Like in housing, monthly payments become far more manageable at lower rates, and therefore affordability and demand, stand to increase. Ford has been leaning away from money-losing all-electric vehicles and putting more resources behind high-margin hybrids. The monthly sales numbers bear out the wisdom of this strategy. Any help on the rate front to make cars more affordable could supercharge a business that’s already headed in the right direction. Enterprise Palo Alto Networks stands out on the enterprise side. In recent quarters, the cybersecurity giant has said that its customers — companies both big and small — have sought to adjust payment terms due to the higher costs of financing. While not a demand issue, we could certainly see changes to the tone and pace around dealmaking and deal size as companies feel better about cheaper borrowing costs. Salesforce , which has also highlighted more measured deal activity, might not benefit as much from lower rates. We’re still trying to figure out how much of the headwind is the financing rates versus customers realizing that they may be able to achieve similar results by leveraging generative artificial intelligence tools from Salesforce rivals such as Microsoft . (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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Stanley Black & Decker power drills are displayed for sale at a Home Depot store in Colma, California.
David Paul Morris | Bloomberg | Getty Images
The S&P 500 and Nasdaq extended their record rallies this week following cooler-than-expected consumer inflation data Wednesday morning. While Fed rate cuts would likely benefit the overall stock market, several names in the CNBC Investing Club portfolio — from housing plays to autos to biotech — could really get a boost.
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