Transcripts

Is Now The Time To Revise Your Portfolio?

PAUL KANGAS: The Federal Reserve is widely expected to cut its benchmark Federal funds rate next Tuesday. Many Fed watchers are expecting that this will be the first in a series of rate reductions. So, is now a good time to make changes to your portfolio? Erika Miller asked the pros.

ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Interest-rate easing is almost always pleasing for the stock market. Studies show the market tends to surge after the Federal Reserve starts lowering interest rates. According to Standard & Poor's, since 1945, the S&P 500 has risen an average of 19 percent in the 12 months following the first rate cut. That's twice as much as the index's average calendar year gain. Standard & Poor's chief investment strategist Sam Stovall says the out-performance makes sense.

SAM STOVALL, CHIEF INVESTMENT STRATEGIST, STANDARD & POOR'S: When you have lower interest rates, what that implies is that six to 12 months down the road, we're likely to see a pick-up in economic activity, as well as an improvement in overall earnings growth prospects.

MILLER: Digging deeper, S&P found small caps outperformed large and growth stocks beat value in a falling interest rate environment.

STOVALL: Investors, since they like to anticipate events, they are anticipating that a series of rate decreases will actually start to spark economic growth and earnings increases and therefore benefit more from the growth side of the equation than the more conservative value side.

MILLER: There was also a big disparity among industry groups, with economically sensitive sectors performing best. Technology gained a whopping 21 percent on average, six months after the first rate cut. Consumer discretionary firms and industrials were also up sharply. On the flip side, defensive sectors like energy, utilities and telecom posted the smallest gains. But there's no guarantee the stock market will follow historical patterns this time. Morningstar equities analyst Josh Peters says the market will face big challenges, including the risk of economic recession.

JOSH PETERS, EQUITIES ANALYST, MORNINGSTAR: Once the initial response -- most likely favorable -- to a Federal Reserve rate cut is into stock prices, people might step back and start to worry more about declining corporate profit growth, or even the possibility that corporate profits are going to decline and I think that that will absorb the bulk of the market's attention.

MILLER: A cut in interest rates may also help boost the appeal of foreign stocks. That's because falling rates put pressure on the dollar, and that helps makes securities outside the U.S. more attractive. Erika Miller, NIGHTLY BUSINESS REPORT, New York.