Pedestrians pass the New York Stock Exchange in front of the closing bell in New York.
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Goldman Sachs encourages its clients to prepare for the possibility that the Federal Reserve will lower interest rates later this year and adjust their equity holdings.  The investment bank's leading equity strategist recommended the healthcare and consumer staples sectors as two key sectors that typically outperformed the broader market after cut-off cycles began.
"As the Fed lowers interest rates, the S & P 500 usually recovers after health care and consumer staples outperform and information technology continues to lag behind," said David Kostin, chief strategist for US equities Goldman Sachs. "Communications Services scored the best relative returns over the next 3 months and outperformed (+4 percentage points, 1
Investors have recently been feeling confident weeks in which the Fed will lower interest rates before year-end, under pressure from weaker economic data, US-China trade tensions and anemic inflation. The S & P 500 rose 4.4% last week, reaching the best week since November as a result of rate cut optimism.
Investors identified using the CME Group FedWatch tool believe that the central bank is likely to cut interest rates at least once by July. The Fed will be meeting next week and again from the 30th to the 31st of July.
Goldman also recommended certain investment themes, such as momentum trades, which are bets, that currently favored stocks will continue to outperform. Momentum investors believe that the uptrend may continue for a long time despite high valuations and steep prices. Kostin also recommended stocks that are trading more quietly than others and encouraged clients to search for low-volatility securities.
Apart from two extraordinary interest rate cuts in 1998 and 2001, Kostin's analysis over the last 35 years has shown that momentum trades yielded an average return of 13% in the 12 months following a rate cut.
"Over the past 30 years, there have been few precedents in which futures discounted a rate cut 30 days before a scheduled FOMC meeting, but the Fed did not lower it," Kostin added.
Easier borrowing costs often give companies with weaker balance sheets an advantage over those with less leverage, Goldman Sachs said. Although companies with strong balance sheets have topped their weak counterparts by 28 percentage points since the beginning of 2017, Goldman believes this could change if Fed Chairman Jerome Powell and his colleagues lower the overnight money rate.
"We were in favor of holding strong balance sheet stocks as the Fed tightened its policy consistently in 2017 and 2018. However, the cautious rise of the Fed this year and the unprecedented valuation premium of strong balance sheet stocks have led us to adopt a more neutral stance in February to take. "Kostin wrote. "Increased corporate leverage and slower economic growth remain a long-term tailwind, but a potential rate cut should be a headwind to further outperform the strong balance sheets."