Goldman Sachs’ Stock Picks if Rates Rise

By MarketsFOXBusiness

Donald Trump quipped last night that his Secret Service nickname would be "Humble." Federal Reserve chairman Janet Yellen’s name might be “hang fire.”

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Goldman Sachs (NYSE:GS) has produced a list of nearly five dozen stocks that will rise or fall when the Federal Reserve finally raises rates after six years of zero-bound rates. Its chief economist Jan Hatzius is sticking fast to the investment bank’s position that the Fed will wait until at least December to raise the federal funds rate. For the names, see below.

An environment of delayed rate hikes means the Fed is likely as jittery about global fragility as it was in 1987, 1994, and 1998, when it reversed course on rate increases.

After the October 1987 crash, the Fed backtracked on rate increases and instead cut rates from 7.25% to 6.875%. The Fed started to tighten and raise rates in 1994, at a time when China devalued its currency, triggering other competitive currency devaluations as well. The Fed continued to raise rates through 1997, but was blamed for setting the stage for the Asian and Russian debt crises in 1998. To stabilize markets and ward off a global crisis, the U.S. central bank then held off on raising rates in 1998, a year which also saw the failure of the hedge fund Long Term Capital Management.

This time, the U.S. is still suffering the hangover from a balance sheet recession, a rare economic event that can take 17 years to recover from, Bridgewater Associates Ray Dalio has said.

So the Fed has been in a corner. It could do what is best for the world, and be slow to raise rates, or do what is best for the U.S. in terms of pricing power, notably for commercial banks, and put them on a slow march back toward 4% to 6%, around historical norms since 1994. But global economic tremors and contractions in Europe, China and emerging markets including Brazil and Russia have the Fed in a tight spot. The Federal Reserve was expected to raise interest rates in June, but an account of an April Federal Reserve meeting reveals that chairwoman Yellen and other Federal Reserve officials were still anxious about slower-than-expected economic growth.

After seven years of “recovery,” more than half a dozen budget showdowns, more than $7 trillion in government spending, and much Federal Reserve help, the number of people working in the U.S. is still lower than it was in 2009 at the height of the crackup, with labor force participation at Carter-era levels.

The economy has expanded at an annual rate of 1.8% under President Obama, half the pace of growth in the first five years of the Clinton Administration, and below the 2.5% annual growth rate for President Bush between December 2000 and December 2005. Median family income today is below the level it was in 1997. Census data show that since 2009, the bottom fifth of U.S. households lost nearly a tenth of their average income, an 8% drop, as of year-end 2014. Retirement, meaning 401(K) and IRA accounts, are in focus like never before.

In the event that rates go up, Goldman Sachs executives appear to take that as a bullish sign, as it is advising that investors can start to profit off of stocks that are set to rise in an improving economy.

“Higher rates will be accompanied by faster growth, suggesting that investors will be more likely to reward firms positioned to grow sales and profits alongside the improving economy,” analyst Elad Pashtan has written.That includes companies that are investing in R&D and capex, companies like Electronic Arts (NASDAQ:EA) or Micron Technology (NASDAQ:MU).

David Kostin, chief U.S. equity strategist at Goldman Sachs, has also pulled together a list of “high-quality” stocks in the ten sectors of the S&P 500 that should do well in a higher-rate environment.

They include McCormick (NYSE:MKC), PepsiCo (NYSE:PEP), CVS Health (NYSE:CVS), National Oilwell (NYSE:NOV), Schlumberger (NYSE:SLB), Simon Property Group (NYSE:SPG), and Blackrock (NYSE:BLK).

Also making the list are lots of financials (of the ten S&P sectors), of which Kostin’s high-quality stock basket is heavily weighted towards. The high-quality names here include Aflac (NYSE:AFL) and regional banks like PNC Financial (NYSE:PNC), BB&T (NYSE:BBT), and U.S. Bancorp (NYSE:USB). Health care stocks are also favored, companies like Biogen (NASDAQ:BIIB), McKesson (NYSE:MCK) and Gilead Sciences (NASDAQ:GILD).

He and his team also like certain industrials, including Stericycle (NASDAQ:SRCL) and General Dynamics (NYSE:GD). And his team likes the tech sector most of all, it makes up 20% of the basket, the biggest. Names here include Google (NASDAQ:GOOGL), Apple (NASDAQ:AAPL), and Oracle (NYSE:ORCL), companies with powerful cash flow, mountains of cash, and strong balance sheets.

However, Goldman is warning that companies with lots of floating-rate debt could be stung as credit terms reset higher. Those names include Bank of New York Mellon (NYSE:BK), Paccar (NASDAQ:PCAR), Progressive (NYSE:PGR), Wells Fargo (NYSE:WFC), Lincoln National (NYSE:LNC) and Martin Marietta Materials (NYSE:MLM).

“We advocate that fund managers should own ‘quality’ stocks and firms with strong balance sheets, while avoiding firms with weak balance sheets and large shares of floating rate debt,” Kostin said.

Home Depot (NYSE:HD), Best Buy (NYSE:BBY), and other retailers like Target (NYSE:TGT) or Macy’s (NYSE:M) could also see volatility in a higher-rate environment, as consumers rebalance their spending habits due to rising costs for consumer credit.

And finally, in a higher-rate scenario, Wall Street has been taking meat axes to valuations of companies that sport high dividends, like utilities and telecoms, making for a crowded trade out the exit door. Reason: In a higher-rate environment, other high-yielding and more stable assets are attractive.

“Within dividend stocks, don't necessarily just reach for the stocks with the highest paying dividend. Those will trade as bonds have traded--if interest rates rise, they're going to selloff and vice versa,” Brian Levitt, senior investment strategist at OppenheimerFunds, has warned.

Here are the 50 stocks in the S&P 500 with the highest dividend yields compiled by FOX Business senior editor Charles Brady, who says: “Many of the names have been beaten down, hence the hefty year-to-date declines in most of them.”

S&P 500 Stocks With the Highest Dividend Yields

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