No Fed Rate Hike: Winners and Losers

The Fed was too afraid to hike rates earlier this month. The reason – or at least one of the reasons – was that “the stock market adjustment combined with a somewhat stronger dollar and higher risk spreads … represent some tightening of financial conditions.”
That was straight from the horse’s mouth. Federal Reserve Chairwoman Janet Yellen said that the stock market played a role in the Federal Open Market Committee’s decision to not raise interest rates at its September meeting.
The FOMC is worried that a rate hike would cause even more people to panic over stocks. Clearly, the committee views rate hikes as a completely negative catalyst for the direction of the stock market.
But as with every major economic decision, there are inevitably some winners and losers. So while we wait for the next round of meetings on rates, now’s the perfect time to take a look at a few of each.

The Winners From the September FOMC Decision

Rates weren’t hiked. So it doesn’t take a genius to figure out that companies that rely on the debt market want rates to stay near zero. Obviously, those are the biggest winners.
Industries like oil and gas production, mining, utilities and construction all rely on having access to debt markets to fund new projects and equipment. Since the Fed decided to not raise rates, these kinds of companies are able to continue utilizing cheap debt to fund their own growth.
While it may not seem like it right now, the “no-hike” decision was actually most beneficial to Caterpillar (NYSE: CAT).
You may have seen that the $40 billion construction equipment maker was recently in the news announcing that it plans to cut 10,000 jobs over the next three years. Obviously, that’s horrible.
But there is an upside for Caterpillar shareholders.
These job cuts are part of an enormous restructuring program that is expected to lower its operating costs by $1.5 billion each year. If rates were going up, Caterpillar would face stiffer interest expenses on top of its already high operating expenses.
What the “no-hike” decision did was extend the time Caterpillar has to get its operations in order before it has to spend more to service its debt.
Right now, Caterpillar has $38.3 billion in total debt – nearly $11 billion of which is due over the next 12 months. Those interest payments can be pretty pricey when you are talking about that much debt.
Of course, since Caterpillar made its own news, its share price plummeted. Right now, at $64 per share, the equipment leader is trading at just 11 times its earnings. That’s historically very cheap.
Unfortunately, its own revenue and operational struggles won’t likely disappear overnight. Its restructuring plan will take several years before investors really begin seeing a difference.
But it does show that the Fed’s decision did benefit some companies. Of course, even without raising rates, that Fed decision hurt other industries.

The Losers From the Fed’s ‘No-Hike’ Call

The most obvious – and loudest – of the losers from that decision is banks.
Prior to the meeting, the banking industry’s most recognizable person, JPMorgan Chase (NYSE: JPM) CEO Jamie Dimon, told reporters that all the hype surrounding the Fed rate hike decision was “a lot of chatter about nothing.”
He was clearly downplaying the fact that his bank would be able to grow its net interest income if rates went up – maybe because he was fearing that they wouldn’t.
Even with his casual dismissal of what the Fed does, it is clearly affecting Dimon’s industry. Financial stocks have fallen across the board since the FOMC vote on Sept. 17.
Citigroup (NYSE: C) and JPMorgan have both declined 7%. Goldman Sachs (NYSE: GS) is down nearly 9% since the morning of the meeting.
The reason behind these moves is simple. If rates go up, these banks will make more money through lending.
You see, banks make their money on spreads: What they make through loan interest they receive minus what they have to pay in the short term to borrow. When rates go up, they have to pay more to borrow, but they earn much more from what they lend.
While the big financials do end up as losers from this no-hike decision, they aren’t the biggest losers. That would be regional banks.
You see, even in this low-rate environment, huge firms like JPMorgan and Goldman Sachs have other tools in their toolbox. They have huge trading floors and commodity specialists. They package loans and sell them off as investments.
Your small neighborhood bank can’t do any of that. Take SVB Financial Group (NASDAQ: SIVB) for example.
It owns Silicon Valley Bank, one of the largest regional commercial banks in one of the fastest-growing places in the country. It makes its money from loans to small businesses. With rates held at zero, it is not nearly as profitable as it could be.
Investors know it. Since the Fed’s decision, SVB Financial is down more than 11%.
That’s not to say that banks want rates to rise quickly. Rising rates puts pressure on consumers who finance cars and homes. But a gradual rate rise would greatly increase the average retail bank.
It’s clear that despite Yellen’s insistence that keeping rates low will help with stock market volatility, it’s certainly not universal.
There are some slight winners, like Caterpillar. But with rates still clinging to zero, there are some serious losers. That’s especially true in the financial sector – and none worse than regional retail banks.

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