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Does History Repeat Itself? 

     Looking at history can sometimes give us a hint of what the future holds.  So, if interest rates are likely to move lower during 2001, what stocks benefited the last time interest rates were lowered?  Instinet did a study of how sectors performed in the 3 months after an interest rate cut.  Their study looked at stock performance over the past two decades.  In the 3 months after an interest rate cut the S&P 500 rose, on average, 4.8%.  There are some general trends, as you would expect.  First, companies that are highly leveraged with debt, benefit when their cost of the borrowed funds go down.  Look at a company’s income statement and you’ll see how much they spent on interest expense.  If the savings from lower interest cost exceeds any reduction in income due to a slower economy (which is why rates are declining) then the company should have a net gain.  Firms that do investment banking and consumer finance were at the top of the performance list.  Companies that have credit as their prime raw material will benefit from lower interest rates because their borrowing costs will go down.  Financial institutions should do well.  The cost of borrowing for their business customers will go down on variable rate loans so there should be more borrowing, with the banks and other lenders still receiving the same margin on loans.  As interest rates go down banks and mortgage lenders see substantially heavier volume in new home loan originations and refinancing of existing mortgages.  Lenders also benefit because financially strapped borrowers are more likely and better able to repay their loans.    Other sectors that history shows do well after interest rate reductions are footwear, retail stores, alcoholic beverages, food stores, electronics, containers and packaging, mining, restaurants, and drug companies.  These sectors rise for a combination of reasons.  Lower interest rates put a small amount of extra money in the pocket of consumers; this bodes well for restaurants.  Alcoholic beverage gains can be linked to a slower economy.  Industrial electronics benefit from lower interest and leasing rates.  Mining and drug companies, along with many of the others are seen as defensive places to park funds during a slower economy.  Sectors that have done poorly after an interest rate cut are: truck parts, chemicals, steel, machinery, autos, building materials, hotels, and computers.  Again keeping in mind an interest rate cut and a slowing economy go hand in hand, these poorly performing sectors make sense.  As an economy slows fewer companies are investing in large capital assets such as trucks and heavy machinery.  In theory history and past performance can help us see into the future and it will be interesting to see if it gives us the clarity we’d hope for. 

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