The Federal Reserve is now almost certain to cut interest rates at the end of the month. And as I explained in DailyWealth last week, that’s huge for stocks.
If history is any guide, it could ignite a major rally over the next year. So you really want to own stocks now, before the news officially hits.
There are a few sectors with histories of even better returns in times like today. And those are far better places to put money to work right now.
Let me explain…
You might not think about it much, but opportunity cost is hugely important in investing.
Imagine you could transport yourself back to 1997 with $1,000 to invest… and that you bought shares of Best Buy (BBY).
By the time 2019 rolled back around, your investment would have increased by 4,400%. Pretty darn good!
But what if you’d bought Amazon (AMZN) instead? If you’d taken that same $1,000 and bought in at the company’s IPO price, your investment would have risen more than 126,421%.
That’s several orders of magnitude better. You can see it in the chart below…
This chart uses weekly data, but you get the idea. The outperformance here is phenomenal.
Everything is relative, including gains. And that’s the basic idea of opportunity cost. Even if you’re getting good returns, could you be getting even better ones somewhere else?
That’s an important question to answer right now, with a rate cut looming.
As I explained last week, stocks have historically risen 11% the year after a new rate cut when the economy was in a recession. Gains were even better without a recession (at times like today), up 24%.
Certain sectors did much better than the market, though. Over the same 12 months, the communications services sector rose 27.5%. Technology climbed 27.1%. And health care jumped 26.1%.
Even the “worst” performers were hardly laggards. The materials sector gained 11%. Utilities tacked on 12.7%. And consumer discretionary stocks jumped 20.1%.
It’s not that you would be making a bad investment in the utility sector… But you would be making a better one in the technology sector. That could be the difference between average returns and great returns.
So if the Fed is going to cut rates, we want to be prepared by owning the right areas of the market. This breakdown doesn’t get right down to the individual companies, but it at least gives you a direction in which to point your looking glass.
And that means you’ll be prepared and ready to act.
Investing isn’t just about what you do. You need to have a well-thought-out game plan behind it. And understanding the opportunity cost is crucial to any great investing plan.
History says you want to own stocks ahead of the next rate cut. And when it comes, communications, technology, and health care are the best places for your investment dollars.
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Source: Daily Wealth