The fluctuation of interest rates can provide a plethora of trading opportunities. Three areas where the prospect of rate cuts could produce bullish results is in regional banks, small-cap equities, and home builders.
Albeit a slow crawl, inflation could finally be heading toward the Federal Reserve’s 2% target rate. In particular, May revealed a lower Personal Consumption Expenditures Price Index, which was 0.2% lower than the previous month, corroborating with a consensus from economists surveyed by the Wall Street Journal.
At the start of the year, optimism was at fever pitch that the Fed would begin a rapid succession of cuts. Instead, the central bank has opted to be more data-dependent, looking for telltale signs before instituting cuts. That has yet to happen. But the recent data could be an early sign that cuts could be underway.
“The overall trend we’ve been seeing of disinflation in general isn’t always going to be a smooth ride,” said Kevin Flanagan, head of fixed income strategy at WisdomTree, via a Wall Street Journal report. “It may be a little more difficult finding out that last mile to get to the Fed 2% goal.”
3 Trades to Ponder
When rate cuts eventually happen, that could increase the demand for loan products and thus, push regional banks higher, particularly those who rely on them for revenue generation. In effect, this could boost the Direxion Daily Regional Banks Bull 3X Shares (DPST ), which provides 300% of the daily performance of the S&P Regional Banks Select Industry Index.
Rate cuts can also lower debt servicing, thereby increasing the bottom line for small-cap companies that often rely on debt to operate. As such, this could boost the Direxion Daily Small Cap Bull 3X Shares (TNA ), which seeks 300% of the performance of the Russell 2000 Index.
Lastly, lower interest rates could regenerate interest in real estate with affordable financing in place. This, in turn, could boost homebuilders, or more specifically, the Direxion Daily Homebuilders and Supplies Bull 3X Shares (NAIL ). The fund seeks daily investment results of 300% of the daily performance of the Dow Jones U.S. Select Home Construction Index. That index measures U.S companies in the home construction sector that provide a wide range of products and services related to homebuilding, including home construction and producers, sellers and suppliers of building materials, furnishings and fixtures, and also home improvement retailers.
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