Bill Ackman predicts interest rate cuts: these stocks could benefit

By | December 23, 2023

Founder and CEO of Pershing Square Capital Management Bill Ackman, a billionaire hedge fund manager with a net worth of $4 billion, is known for the strategic investment bets he makes by timing the markets.

Ackman previously made a hundredfold profit by hedging his investments using credit default swaps after predicting an economic shutdown due to the outbreak of the COVID-19 pandemic. He also pocketed $200 million in October by shorting US government bonds.

Given his impressive track record of timing the market, following his predictions could yield significant returns. Ackman predicted in late November that the Federal Reserve would start cutting the fed funds rate as early as the first quarter – before the final meeting of the Federal Open Market Committee (FMOC) in early December.

“We’re betting that the Federal Reserve will have to cut rates faster than people expect,” Ackman said on “The David Rubenstein Show: Peer-to-Peer Conversations.” “That’s the current macro bet we have.”

Ackman’s predictions came true after the Fed unveiled a forgiving stance at the FOMC meeting, with Chairman Jerome Powell stating that current macroeconomic indicators “could just be a sign that the economy is normalizing and the tight policy is not needed ,” according to CNBC. .

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Some of the biggest stocks that could benefit from reduced interest rates are:

Tesla

Elon Musk has long recognized the downsides of keeping interest rates at record highs as they affect the affordability of electric vehicles. Since most people live paycheck to paycheck and have significant credit card debt, Tesla Inc.’s (NASDAQ:TSLA) vehicles seem like a pipe dream, even with tax breaks.

“I think there are still a lot of shoes to drop because of the bad credit situation. Commercial real estate is obviously in a terrible condition. You know, credit card interest rates are exorbitant with interest rates over 20%, which over time becomes extremely punishing,” Musk said during an earnings conference call. “So you know, the auto industry is also somewhat cyclical. People are hesitant to buy a new car when there’s uncertainty in the economy.”

As geopolitical tensions continue, Musk expects auto sales to remain under pressure as the auto industry is cyclical. With the Fed expected to cut interest rates soon, market sentiment is improving and demand for electric vehicles is expected to rise.

Googling

Alphabet Inc. (NASDAQ:GOOG), the parent company of Google, is Ackman’s largest portfolio, valued at approximately $1.2 billion. Ackman also owns 4.35 million voting Class A shares of Alphabet, which were valued at nearly $570 million as of September 30.

Alphabet has struggled last year compared to its Magnificent Seven peers as the company lagged in capitalizing on the artificial intelligence (AI) boom. The company’s generative AI platforms have failed to gain momentum comparable to that achieved by Microsoft Corp. backed OpenAI’s explosive ChatGPT platform.

But Google has been making aggressive investments and is in acquisition talks to regain a competitive advantage. As interest rates fall, Alphabet’s financing costs will fall, increasing its return on capital.

On December 6, Alphabet introduced its state-of-the-art artificial intelligence model Gemini AI, highlighting its advanced ability to analyze various forms of data, including video, audio and text. Previously, Alphabet had committed nearly $500 million in funding to Anthropic AI, a company focused on creating a generative AI platform to compete with ChatGPT. Alphabet is also discussing the acquisition of Character.AI, a fast-growing startup specializing in AI chatbots.

Caterpillar

Caterpillar Inc. (NYSE:CAT) is one of the largest construction and equipment companies in the US and is a component of the Dow Jones Industrial Average (DJIA) Index. Shares of Caterpillar are up more than 22% so far this year, reaching an all-time high of $293 on December 19. The industrial stock has outperformed the 13.3% returns of the benchmark DJIA index so far this year.

Industrial stocks have historically benefited from lower interest rates, which stimulate construction activity in the economy. Analysts expect Caterpillar sales to rise 6.4% year over year to $16.23 billion in the first quarter of 2024.

Caterpillar is also a prominent Dividend Aristocrat, as the company has increased its annual dividends consecutively for the past thirty years. The company pays $5.20 in dividends annually, yielding 1.82% on the current share price.

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Image: Bill Ackman. Collage created using a photo from Center For Jewish History, NYC on Wikimedia and engin akyurt on Unsplash

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