Rates Stuck, But Your Portfolio Shouldn't Be: Time to Trim These Stocks?

Imagine a giant thermostat for the American economy. That's what interest rates are - a tool used by the Federal Reserve to regulate economic activity. By raising or lowering the interest rate, the Fed can influence small day-to-day decisions such as spending money on your credit card (due to credit card interest), and even big decisions such as a company’s decision to expand. America has a Federal Open Market Committee (FOMC), who meet every 6 weeks to discuss whether to increase, decrease, or leave interest rates unchanged, depending on their monetary policy and goals. The latest outcome of FOMC’s meeting was to leave interest rates unchanged.

At the moment, the interest rates are steady at a target range of 5.25 to 5.5%, this marks the 7th month that the interest rates have been the same There are many potential reasons that the Fed decided to keep the interest rate unchanged - the main reason being to tame inflation. During the COVID-19 pandemic, the inflation rate in the United States peaked at 9.1% in June 2022, since then the interest rate has risen by 5 percentage points within 11 months since their peak. The current US inflation rate has been fluctuating between 3.1% and 3.7% over the past eight months, with the most recent reading being 3.2%. This has shown that the hikes in the interest rates have been successful however, the decline in inflation hasn't been steady. It's still unclear yet if the current levels will hold, it is also important to note the Fed’s target level of inflation is typically around 2% so that may be the reason that interest rates remain high.  

Unchanged interest rates mean that consumers with existing debt have stability in their budget. This is because if you already have a mortgage, car loan, or other debt at a fixed interest rate, an unchanged rate means you won't see an immediate increase in your monthly payments. Also, this is the same when it comes to businesses with existing loans at fixed rates as it allows them to benefit from predictable borrowing costs, which in turn allows them to focus on core operations without having to worry about a sudden increase in interest. 

This will also benefit sectors reliant on borrowing. The US has a huge manufacturing sector which sums up to 11% of the US GDP. The US is also a global leader in aerospace manufacturing- which as a result might benefit from an unchanged rate as they are extremely likely to rely on borrowing for equipment or facility upgrades. 

Finally, it will also affect sectors sensitive to interest rates such as real estate. While overall housing market activity might be dampened by high interest rates, some Real Estate Investment Trusts (REITs) focused on commercial properties could benefit. Unchanged rates might make them more attractive to investors seeking stable returns compared to riskier assets.

JPMorgan Chase & CO

JPMorgan Chase & Co (ticker: JPM) is a global leader in financial services and offer a range of services - including commercial banking, investment banking, and also asset management. If interest rates remain unchanged, it would provide short-term stability, unchanged rates mean that JPM will be able to preserve its profit margins between interest charged on loans and interest paid on deposits. Also, JPM has a very strong presence in developing economies with higher potential growth rates, which means that this can help offset any slowdown in mature markets. However, when considering future cuts to the interest rate in the future, if the market heavily anticipates it, investors might hold off on buying JPM stock, waiting for potentially higher returns in other sectors that could benefit more from lower rates later. 

JPM’s net interest income has grown significantly in line with high-interest rates (to $22.7bn) - this is because higher rates mean greater interest income for banks, and JPMorgan’s net interest income - the difference between what it earns on loans and what it pays to customers for their deposits. So with experts predicting a reduction in the interest rate coming toward the end of 2024, selling JPM stock would be a smart decision, however, please note that these are predictions and investing is a risk.

Our final verdict = SELL

Lockheed Martin (LMT)

Lockheed Martin (ticker: LMT) is an American aerospace, arms, defense, information security, and technology company. At the moment, unchanged interest rates may benefit Lockheed Martin as they have a lot of debt - $17.45Bn to be exact. Although this is a substantial amount, Lockheed Martin has variable-rate debt meaning that unchanged interest rates can help them maintain their profit margins. This is because their borrowing costs wouldn't increase, while they can potentially raise prices to keep up with inflation. Also, with experts estimating cuts to the interest rate towards the end of 2024, LMT seems like a good investment. This is because of the indirect benefit from airlines - airlines are a major customer base for LMT's commercial aircraft parts and services. As airlines benefit from lower borrowing costs in the future, they might be more likely to invest in fleet upgrades and potentially increase demand for LMT's products. Also, a significant portion of LMT's revenue comes from government contracts for military aircraft and defense systems. These contracts are typically less sensitive to interest rates compared to commercial aviation. This is extremely important as Donald Trump is likely to become the next president of the United States, and is known to spend large amounts on defense, which will mean more profit for LMT and thus higher stock prices. It is also important to consider the Russia-Ukraine war and the impact that it has had on military budgets worldwide - the US has sent $46.3 billion in aid to Ukraine whilst also bumping up their defense spending as Russia’s threat level continues to rise, so investing in LMT is a no-brainer. However, please note that these are predictions and investing is a risk.

Our final verdict = BUY

And that's a wrap on the first episode of GAIN! We hope this glimpse into the world of investment analysis has been valuable. Remember, the journey to financial success starts with informed decisions. Keep learning, keep researching, and keep your eyes peeled for new opportunities. We'll see you again next week with another insightful episode of GAIN!