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Now that the Fed is in rate-cutting mode, it's key to put the right stocks in your portfolio to get the most bang for your buck. You need to build exposure in three areas:
- Companies in cyclical sectors such as retail and technology, which benefit the most when the economy is growing.
- Banks, as one of the main ingredients in their business -- money -- just got cheaper.
- Gold.
To find superior stocks in these groups, I looked for companies where insiders are buying lots of stock. I also consulted some of the best mutual fund managers in the business. I'll reveal my picks in a moment.
A rally cocktail
But before we get to the specific stocks, let's address the big question: With continuing subprime-mortgage problems and weakness in the housing sector, how can I be so sure that stocks will continue marching higher?To find an answer, consider history. Since 1973, there have been nine Fed rate-cutting cycles, and the S&P 500 Index ($INX) has been higher a year later in seven of them, points out Lehman Bros. equity strategist Ian Scott. The median advance a year later in all nine rate-cutting cycles was 18%.
Sure, there were two times when this rule failed, in 1981 and 2001. But we aren't likely to see a repeat of those disaster scenarios.
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First, the Fed is determined to keep the economy rolling. "Fed Chairman Ben Bernanke and his colleagues have unambiguously demonstrated that their immediate goals are to put a quick end to the credit crunch, to stop home prices from falling and to avert a recession," says Ed Yardeni of Yardeni Research. He sees the potential for a "significant year-end relief rally" that could take the S&P 500 to 1,665 and the Dow Jones Industrial Average ($INDU) to 15,000.
Next, the Fed is probably not done cutting rates. "Normally you get a cycle. Typically, you don't have 'one cut and it's done,'" says John Derrick, the director of research at U.S. Global Investors (GROW, news, msgs). Plus, don't forget that Bernanke knows as well as anyone that a strong economy this time next year will help the party that appointed him, the GOP, keep a hold on the White House -- another incentive for more rate cuts.
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Jubak's Journal: 50 best stocksA falling dollar has helped big-company stocks outperform small-company stocks in 2007. Although both have rebounded from August lows, MSN Money's Jim Jubak says investors will continue to move to the safety of big-company stocks.
Third, despite all the housing sector gloom and doom, many factors support robust U.S. economic growth, says James Paulsen, an economist who is the market strategist at Wells Capital Management. Chief among them: Annual global economic growth remains strong, and the impact in the U.S. is amplified by a weaker dollar, which increases demand for U.S. goods. Paulsen sees the potential for a "rally cocktail" later this year once fears about the credit markets and the housing sector ease -- as he suspects they will.
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