Last week, the Federal Reserve announced yet another 75-basis-point hike, raising interest rates to 3.75-4.00%.
The hike was no surprise, but the prospect of those hikes continuing into the New Year and beyond might have driven you to grab a cold one out of the fridge.
These rate hikes, on the other hand, are hard to swallow. After all, they’re likely to keep a damper on growth stocks… and maybe even drive us into a recession.
However, such Fed moves serve as catalysts for certain groups of stocks, including the makers of that cold one. So, we’re optimistic that last week’s rate hike – and the October labor numbers released last Friday – are creating some good opportunities for investors.
Here’s how we’re playing the latest news – and the stock we’ve targeted in light of it…
While we expected the 0.75% rate hike (and the continuation of increases at least through 2023), we did not anticipate the dovish tone of the FOMC’s comments that followed…
In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.
In plain English, that means we’ve likely seen the last of such steep 0.75% rate hikes. They’re no longer an inevitability each time the FOMC meets. Rather, we think the Fed will rely on cumulative data to guide its next hike – instead of automatically hiking rates.
That may not sound particularly significant, but an acknowledgment from the Fed that they will be more thoughtful about hikes based on data is a good sign. It means we’re likely to see hikes in the 0.25-0.50% range rather than the monster ones we’ve been absorbing over the past several months.
Remember, the Fed is trying to mitigate inflation. The rate seems high… because it is. The last time the Fed Funds Rate was this high was just before the financial crisis in 2007.
But when compared to rates in the 1980s and most of the 1990s, an overnight rate higher than 4% was the rule, not the exception.
Labor numbers for October were released last Friday, and the news was good. More jobs were added than had been expected, and wages rose 0.4% on a month-over-month basis, rather than the expected 0.3%.
This is all good news for the economy. But because it also means that the Fed’s plans to keep raising rates (even if at a slower pace), it’s not great for stocks.
So we expect some back and forth in the market as things settle down and gear up for the holiday season. A market like this can be frustrating, but there are still good opportunities for significant gains… and income.
Like the sector we’ve had our eyes on for quite some time…
The Stars in the Consumer-Defensive Sector
For a while now, we’ve liked stocks in the “consumer-defensive” sector, which consists of the retailers and marketers of food, drinks, home goods, etc. Think of the stores you shop in from week to week – and what you buy there. That means Walmart Inc. (WMT), Target Corp. (TGT), and The Coca-Cola Co. (KO) are all worth taking a look at now.
One of our favorite stocks in this sector is Constellation Brands Inc. (STZ). The company has more than 100 brands of wine, beer, and spirits in its portfolio – including several hard seltzers under the Corona, Funky Buddha, and Fresca brands.
A strong dollar has been a big support to their import business, and the dominance the company has in the emergent seltzer business continues to grow.
Seltzers are poised for explosive growth in the next few years, so we’re bullish on Constellation Brands. In fact, PR Newswire reported last week that the U.S. hard seltzer market is poised to grow by $1 billion from 2021 to 2026 and has a compound annual growth rate of 13.59%. STZ is listed as one of the key players in the industry.
The bullish case for the consumer-defensive sector is compelling. As we noted in last week’s issue, earnings season is showing us that American consumers are still buying Harleys and going on cruises. And if they’re doing that, then we know they’re spending money on the essentials (and for many folks, the alcoholic drinks Constellation sells absolutely are essentials).
But you can’t just throw a dart and hope whichever stock you hit has profit potential.
For us, STZ stands out among the crowd – so much so that we opened a new trade on it on Friday in our Strategic Trader elite research service. For our case on STZ – and on the other stocks we’re currently targeting – you can learn more here.
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John and Wade