These stocks could win when the Fed starts hiking rates, history shows

Published Tue, Mar 15 20229:59 AM EDTUpdated Tue, Mar 15 202210:18 AM EDT

As the Federal Reserve gears up to hike rates this week, CNBC Pro found one standout sector that could outperform the S & P 500 based on its track record in recent history. The Federal Reserve has maintained rates near zero to stimulate the economy amid the pandemic, but the tides are changing as inflation soars to its highest level in 40 years. Investors anticipate the Fed will announce a quarter-percentage-point increase to its benchmark short-term borrowing rate for the first time in three years at the conclusion of its policy meeting on Wednesday. While higher rates typically mean higher borrowing costs for consumers, there are some rosy investing opportunities — and some stocks that tend to outperform the S & P 500 following a rate hike, according to a recent screen by CNBC Pro. The clear-cut winner: Utilities. Five companies within the sector ranked among the top 10 stocks with the highest returns on average after Fed rate hikes, while three notched spots within the top five. The sector typically offers high dividends to investors and more stability than some other equities, although it does face competition from bonds promising stable income when rates rise. "They are economically insensitive, relatively speaking, and they pay a good dividend yield," said Bleakley Advisory Group's Peter Boockvar. "It makes perfect sense for them to outperform." To find the post-hike winners, CNBC Pro identified the last three times the Fed raised rates after an extended period of no hikes. Those hikes occurred on June 30, 2004; Dec. 16, 2015; and Dec. 14, 2016. Using FactSet data, CNBC Pro analyzed on average how stocks in the S & P 500 performed one month later. Here are some of the top-performing companies: NRG Energy was among the index's top performers in 2016 (14.2%) and saw the greatest average return one month after a rate hike. Exelon and Duke Energy on average saw 3.9% and 3.7% returns, and their stocks are up about 6% and 1% this year, respectively. Healthcare companies Intuitive Surgical and Centene also performed well, returning 8.9% and 4.9% on average. Boockvar notes that consumer non-durables also tend to succeed during rate hikes, although this scenario is "more nuanced." He cautions that rising commodity prices may put pressure on costs, plus inflation is still high and long-term interest rates are climbing. "I'm not sure if the same playbook will work this time," he says.

Timothy Gardner and David Knox are seen next to a Petra Nova CCS Facility at NRG Power Plant in Richmond, Texas, U.S., May 18, 2018.

Trish Badger | Reuters

As the Federal Reserve gears up to hike rates this week, CNBC Pro found one standout sector that could outperform the S&P 500 based on its track record in recent history.

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These stocks could win when the Fed starts hiking rates, history shows

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