Falling Inflation: Who Are Likely To Be The Stock Market Winners?

Whether inflation fell or rose slightly in December, analysts still forecast the Federal Reserve will start to cut interest rates in the first few months of 2024.

Which stocks and sectors are likely to welcome these cuts the most?

The December inflation report will be published on Thursday and it is among the key economic data reports that shape Fed policy in the early months of 2024. Consensus estimates suggest the annual headline rate will tick higher to 3.2%, up from 3.1% in November.

Equity markets, as a whole, responded last year to signs inflation was cooling and the Fed wouldn’t raise interest rates beyond the 5.25%-5.5% hit in July. Between late October and the end of December, the S&P 500 put on 16% — as did the exchange-traded fund that tracks it, the SPDR S&P 500 SPY.

“The countdown to the latest U.S. inflation reading has begun, and investors are hunkering down ahead of a potentially volatile period for markets,” said Chris Beauchamp, chief market analyst at IG.

He added: “Broader risk-off sentiment could prevail tomorrow and beyond should U.S. inflation show signs of reviving.”

This might mean higher-for-longer interest rates as the Fed delays any inkling to cut rates. But, if the inflation reading comes in at expectations — or below — perhaps we’ll see risk appetite rise again.

So, which stocks would benefit from the lower inflation scenario? We’ve picked out a few categories here.

Also Read: Record Online Holiday Spending Driven By Deep Discounts And ‘Buy Now, Pay Later’ Deals

Consumer Confidence Rises

Consumer confidence is tightly linked to inflation and inflation expectations. The last measure of consumer confidence published by the University of Michigan was the best reading in five months as expectations of inflation for the year ahead dropped to 3.1%.

Lower inflation in the coming months will improve consumer confidence so long as the economic downturn doesn’t become too severe and drive unemployment higher. Thus, consumer-oriented stocks should perform well.

Amazon.com, Inc. AMZN already rallied strongly during 2023. It remained the world’s biggest e-commerce company and now has its hand in many other enterprises — particularly, it is a leader in artificial intelligence development which is likely to be a key investment thesis in 2024.

Home Depot Inc HD shares gained nearly 10% during 2023. Recent holiday spending data showed furniture sales held up well during the period, and if the housing market improves in 2024, Home Depot could benefit too.

Mortgage Rates Come Down

Construction could be a strong tailwind for growth in 2024 if homebuilding keeps pace with the rate at which it grew at the end of 2023. Helped by falling mortgage rates and demand for new housing starts soared in November.

This could be another big year for the sector as affordability issues ease with falling inflation and lower interest rates pulling mortgage rates even lower.

The iShares US Home Construction ETF ITB gained a staggering 67% during 2023, despite high interest rates and its top two holdings, DR Horton Inc DHI and Lennar Corp LEN gained 61% and 55%, respectively.

Debt Burdens Become Easier To Manage

Highly indebted companies were not among the best performers during the Federal Reserve’s rate hike cycle as higher interest rates made it more difficult for them to service their debt and loans.

In 2023, Verizon Communications Inc VZ, the most highly indebted company on the S&P 500, with a total debt of around $147 billion, fell 4.3%.

It did, however, join in the October-December rally after it became more clear the Fed was unlikely to raise rates further.

At the other end of the debt scale, smaller companies find it particularly difficult to service their debts and loans — and if their backers call in their debts, other sources of funding aren’t easily available.

Thus, companies on the Russell 2000 index of smaller companies could have a better year in 2024 as interest rates begin to fall.

Photo: Shutterstock