The U.S. Fed has been on one of its most aggressive rate-hiking sprees in decades. From zero bound interest rates at the beginning of March 2022, it has raised the benchmark rate to 5.25%-5.50%, which is the highest since early 2001.
While the Fed’s rate hikes have been among the reasons annualized CPI fell to 3.2% in October 2023 – down sharply from the peak of 9.1% in June 2022 – they have also worked to the detriment of stocks, especially growth names.
Fed Rate Hikes Have Caused a Slowdown
Companies across multiple different sectors - including retail and ecommerce, automotive, and solar - have blamed higher interest rates for the slowdown in their sales. Tesla’s CEO Elon Musk has been among the fiercest critics of the Fed, and has also been predicting a recession, which he believes will be amplified by the Fed’s rate hikes.
Meanwhile, Fed Chair Jerome Powell and company have surprised markets with their resolve 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 rate hikes to rate cuts. However, the pivot has been a mirage so far, and while the Fed has signaled that it is near the end of the rate hike cycle – if not the actual end – it has shown no inclination towards a rate cut.
In fact, Powell has dashed expectations of rate cuts multiple times. At the press conference following the November FOMC meeting, he said, “The fact is, the Committee is not thinking about rate cuts right now at all.” The recently released minutes of that meeting also showed that the central bank is not looking at rate cuts anytime soon - and, if anything, might look at raising rates again if the situation warrants.
Markets Believe Fed Will Cut Rates in 2024
Traders, meanwhile, believe that the Fed will cut rates multiple times in 2024, and the CME FedWatch tool shows that less than 1% of traders believe that rates will be at current levels by the end of the next year. Currently, 27.8% of traders bet 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 disappointed rate-cut proponents so far, slowing economic growth and the continued decline in inflation could mean that it starts cutting rates in 2024.
Which Stocks to Buy Before Fed Starts Cutting Rates?
I believe Enphase Energy (ENPH) and Rivian (RIVN) are two stocks that look like good buys ahead of an eventual Fed rate cut. Both of these stocks have tumbled from their peaks, and a rate cut could spur a rally.
Solar stocks are languishing at the bottom of the S&P 500 Index ($SPX), and not without reason. Enphase Energy - along with peers SunPower (SPWR) and SolarEdge (SEDG) - have not only posted dismal numbers, but also provided lower-than-expected guidance.
Solar companies are struggling with four main headwinds. These are:
- Higher interest rates that are taking a toll on sales
- Macroeconomic slowdown, which has made some buyers wary
- High supply chain inventories, which means that their sales have been lower than the end market demand
- Lower incentives in California, which is the largest solar market in the U.S.
The supply chain inventories are expected to stabilize later next year, and if the Fed also starts cutting rates by then, it should be another positive for solar installation. Overall, with reasonable valuations, a strong balance sheet with good cash flow generation capacity, and a bullish long-term outlook, I believe Enphase is one stock worth scooping up as interest rates start moving towards more normalized levels.
Rivian Stock Should See Better Days Once the Rate Hike Cycle Reverses
Rivian is another stock that I believe will see much better days once the rate hike cycle reverses. It has 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 harsh on almost all the EV stocks this year, barring Tesla, amid concerns over slowing sales and the price war. However, Rivian is one name that can withstand the industry slump much better than many other startup EV companies, and has somewhat proved 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 nonetheless noteworthy amid the guidance cuts by multiple other EV players.
I believe that once the sentiment towards growth names changes after 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 starts reversing its rate hike cycle.
On the date of publication, Mohit Oberoi had a position in: RIVN , NIO , ENPH . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
