Fed playbook: Which stocks to buy or sell depending on what the Fed does

Published Wed, May 3 202311:17 AM EDTUpdated Wed, May 3 202312:29 PM EDT

As investors look to position based on the Federal Reserve's path of rate hikes, certain names stand out as winners — depending on the direction the central bank takes. The Fed is widely expected to increase its benchmark borrowing rate by a quarter percentage point on Wednesday, bringing it to a target range of between 5% and 5.25%. What investors are focused on is whether the central bank signals it is leaving the door open to more increases or is done hiking. If the Fed opts to pause, Treasury yields are expected to decline. Yields and prices move inversely to one another. The two-year Treasury is most sensitive to the Fed's monetary policy. With that in mind, CNBC Pro screened for the stocks most sensitive to rates. We looked at the 100-day correlation between each S & P 500 stock and the iShares 1-3 Year Treasury Bond ETF (SHY), which tracks the value of 1-year to 3-year Treasurys. A higher SHY indicates short-term rates are falling, and vice versa. Stocks that could gain on falling interest rates Here are the top stocks that are poised to move higher if the Fed signals it will pause rate increases. Newmont has the highest rolling 100-day correlation to the SHY, meaning if the ETF moves higher the stock will likely follow. Since yields move inversely to prices, the fund will rise if interest rates fall. The gold miner benefits from a rise in gold prices, and in general, gold tends to rise when interest rates fall. The precious metal, known as a hedge against inflation, on Wednesday hovered above $2,000 , a key level for investors. Shares of Newmont are up nearly 2% so far this year. Several energy names also made the list, with WEC Energy and Xcel Energy leading the sector's correlation. WEC Energy has gained about 1.6% year to date, while Xcel Energy lost 1.4%. Meanwhile, genetics company Illumina should gain if interest rates fall, according to its correlation to the SHY ETF. Illumina is in the middle of a proxy fight with activist investor Carl Icahn over its acquisition of cancer test developer Grail. Icahn, who has a 1.4% stake in the company, slammed the company's "very disappointing" first-quarter results and its plans to cut costs. In an open letter to shareholders , Icahn said CEO Francis deSouza was "desperately, hilariously and, most of all, unsuccessfully" trying to spin the "decidedly mediocre" quarterly results. Illumina posted quarterly revenue of $1.09 billion, topping the $1.07 billion expected by analysts polled by StreetAccount. Adjusted earnings per share came in at 8 cents, above the 1 cent per share expected. However, the company's net income of $3 million for the quarter was down more than 96% from the $86 million from the same period a year ago. Stocks poised to gain on rate increases However, if the Fed suggests rate hikes will continue, short-term Treasury yields will likely go up, benefiting these stocks. Comerica has the largest negative rolling 100-day correlation to the SHY ETF and therefore could be one of the biggest beneficiaries of rising interest rates. Several regional banks made the list, including KeyCorp , Huntington Bancshares and Fifth Third Bancorp . Banks profit when interest rates rise. However, regional banks have been volatile since the collapse of Silicon Valley Bank caused concern about their health. The sector's sell-off continued this week after regulators took possession of First Republic on Monday and JPMorgan Chase won the auction for nearly all of its deposits and most of its assets. "There are only so many banks that were offsides this way," JPMorgan CEO Jamie Dimon said on a call with analysts after the deal was announced. "There may be another smaller one, but this pretty much resolves them all," he added. "This part of the crisis is over." The SPDR S & P Regional Banking ETF has lost 38% so far this year.