Investors Eagerly Anticipating the Start of Rate-Cut Season
Q: What do the Federal Reserve and the National Football League have in common?
A: They’re both expected to kick off new seasons in September.
The 2024 NFL season kicks off Thursday, Sept. 5, when the Super Bowl-champion Kansas City Chiefs host the Baltimore Ravens.
For the Fed, Wednesday, Sept. 18, is the next Fed policy meeting after this Wednesday’s summit.
And that is the date the Fed is widely expected (90% odds) to kick off its “new season” for lowering interest rates with the first of what investors hope will be a series of Fed funds rate cuts.
Ever since better-than-expected inflation data just a few weeks ago, the odds of a Fed pivot to quickly reduce interest rates have gone through the roof.
As you can see above, the Fed funds futures market is now pricing in very high odds of three interest-rate cuts by year end.
That’s one 0.25% rate reduction at each Fed meeting in September (82% odds), November (61%), and December (57%).
While it looks like a near-certainty the Fed will start cutting rates soon, it probably will not start with tomorrow’s policy meeting.
Most likely the Fed will telegraph future rate cuts, but not follow through until their next policy meeting Sept. 18. So, the risk is that markets could be too optimistic about the timing of interest rate cuts.
Still, markets are already cashing in on the potential for lower rates by bidding up the prices of small-cap stocks, as I pointed out recently.
Value stocks, financials, and real estate investment trusts (REITs) are the other usual suspects that traditionally get a boost from lower interest rates.
Interest-rate cuts can also be a big positive for banks and other financials stocks because as rates come down, their net interest income gets a boost. That’s basically the spread banks earn between lower short-term interest rates and higher, longer-term consumer and business lending rates.
So, it’s no surprise to me that the SPDR Regional Banking ETF (KRE) has soared a spectacular 16.2% over the past 14 trading days alone. This index is chock-full of small- and mid-cap bank stocks, including many smaller community banks.
As with small-cap stocks in general, I believe this could be just the start of a new market-leading move for financial stocks, especially the smaller regional banks and REITs.
With that in mind, I revisited our TradeSmith Screener tool to help me identify the best small- and mid-cap bank stocks and REITs.
(If your TradeSmith Finance platform doesn’t look like mine, it’s because I have every single feature of TradeSmith through my Platinum-level access. If I mention any tools in today’s column that you don’t see in your Dashboard, and you’d like to, call 888-623-0858 to discuss.)
How to Screen for Small-Caps and Banks
Here’s how I set up my Screener.
From the main menu of your TradeSmith Finance platform, simply click on Invest, then Screener, then the + Create new screener button.
I created this easy but powerful stock Screener with just four filters.
1. Markets, select S&P 600 (SML), Russell 2000 (IWM), and S&P 400 (MID), the mid-cap stock index that also includes many regional banks.
2. Sectors, include Banks and Real Estate.
3. Business Quality Score (BQS), one of my personal favorite metrics, I set the filter at more than 50.
4. Jason Bodner’s proven Quantum Score, set this filter to between 70 and 85.
According to Jason’s work, the Quantum Score includes a combination of over 100 technical (volume, volatility, price strength, etc.) and fundamental (sales, profits, debt levels, etc.) factors.
And the secret sauce on top is Jason’s proprietary Big Money Index. This can point you to stocks that not only have strong fundamental and technical metrics, but also the all-important element of major institutional buying power to propel shares higher.
A Quantum Score between 70 and 85 is the sweet spot for new buy candidates, according to Jason’s research.
Our system gave me 29 total results, and below are the top 10 (sorted by BQS).
Keep in mind that you can and should make this Screener all your own, as is the case with every example Screener I’ve shared.
Add filters for valuation, performance, fundamentals, or other TradeSmith-specific filters like Seasonality. This way it becomes your own personal TradeSmith screener.
Mike Burnick’s Bottom Line: With the Fed finally about to kick off interest-rate cuts, it’s a great time to screen for small-cap bank stocks that could wind up being big winners from lower rates. And our exclusive TradeSmith tools can help you quickly and easily uncover these stocks.
Good investing,
Mike Burnick
Senior Analyst, TradeSmith