The US Fed has been in one of its most aggressive rate runs for decades. From zero-linked interest rates in early March 2022, it raised the benchmark rate to 5.25%-5.50%, which is the highest since early 2001.
While the Fed’s rates were among the reasons that annual CPI fell to 3.2% in October 2023 – sharply down from the peak of 9.1% in June 2022 – they also worked to the detriment of stocks, especially growth names.
Fed Rate Hikes Caused Slowdown
Companies across several different sectors – including retail and e-commerce, automotive and solar – have blamed higher interest rates for the slowdown in their sales. Tesla CEO Elon Musk has been among the Fed’s fiercest critics, and has also predicted a recession that he believes will be fueled by the Fed’s rate hikes.
Meanwhile, Fed Chairman Jerome Powell and company surprised markets with their decision to keep interest rates elevated, even at the risk of causing a recession. For more than a year now, observers have been predicting a “pivot” – or the transition from tariffs to tariffs. However, the pivot has been a mirage so far, and while the Fed has signaled that it is nearing the end of the rate-hike cycle — if not the actual end — it has shown no inclination to cut rates.
In fact, Powell has broken expectations for tax cuts several times. In the press conference after the November FOMC meeting, he said, “The fact is that the Committee is not thinking about rates at all right now.” The recently released minutes of that meeting also showed that the central bank is not looking at rate cuts anytime soon – and, if anything, may look at raising rates again if the situation allows.
Markets believe the Fed will cut rates in 2024
Traders, meanwhile, believe the Fed will cut rates several times in 2024, and the CME FedWatch tool shows that less than 1% of traders believe rates will be at current levels at the end of next year. Currently, 27.8% of traders are betting that rates will be 4.50%-4.75% by the end of 2024, and a similar percentage believe that rates will be 25 basis points lower than that. While the Fed has so far disappointed rate cut proponents, slowing economic growth and the continued decline in inflation could mean it starts cutting rates in 2024.
Which Stocks to Buy Before the Fed Starts Cutting Rates?
I believe Enphase Energy (ENPH) and Rivian (RIVN) are two stocks that look like good buys ahead of any Fed rate hike. Both of these stocks have fallen from their peaks, and a tax cut could spur a rally.
Solar stocks continue at the bottom of the S&P 500 Index ($SPX), and for good reason. Enphase Energy — along with peers SunPower ( SPWR ) and SolarEdge ( SEDG ) — not only posted dismal numbers, but also provided lower-than-expected guidance.
Solar companies struggle with four main headwinds. These are:
- Higher interest rates that impact sales
- A macroeconomic slowdown that has made some buyers wary
- High supply chain inventories, which means their sales were lower than the final market demand
- Lower incentives in California, which is the largest solar market in the United States
Supply chain inventories are expected to stabilize later next year, and if the Fed also starts cutting rates then, it should be another positive for solar installation. Overall, with reasonable valuations, a strong balance sheet with good cash flow generating ability, and a bullish long-term outlook, I believe Enphase is one stock worth investing in as interest rates begin to move toward more normalized levels.
Rivian Stock Should See Better Days After the Rate Hike Cycle Reverses
Rivian is another stock that I believe will see much better days once the rate hike cycle reverses. It’s been a tough year for startup EV companies, and names like Rivian, Lucid Motors ( LCID ), NIO ( NIO ) and Fisker ( FSR ) are in the red — even as Tesla ( TSLA ) is among the top 10 S&P 500 gainers. .
Markets have been tough on almost all EV stocks this year, except for Tesla, amid concerns about slowing sales and the price war. However, Rivian is one name that can weather the industry downturn much better than many other startup EV companies, and has somewhat proven its mettle by raising its 2023 guidance twice. While in absolute terms the latest production guidance is only 4,000 cars higher than the original guidance, it is nevertheless notable among the guidance reductions of many other EV players.
I believe that once sentiment on growth names changes following the Fed’s rate cuts, Rivian will be among the biggest beneficiaries. With attractive valuations, a strong growth outlook and a brand that some believe has the strength to take on Tesla, Rivian is one stock worth buying at these depressed levels before the Fed begins to reverse its rate hike.
At the date of publication, Mohit Oberoi held positions in: RIVN , NIO , ENPH . All information and data in this article is for informational purposes only. For more information, please see Barchart’s Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.