While major market indexes suffered another body blow Tuesday, a deeper look at the market shows Wall Street didn't completely ignore the Federal Reserve's extreme step to help the economy.
The overall market fell more than 1% after a whippy session following the Fed's surprise three-quarter-point cut to short-term interest rates. But health care stocks suffered as investors reconsidered their bets on this traditionally defensive sector. Meanwhile, banks and retailers enjoyed powerful rallies as investors bet those hammered areas of the economy have suffered enough.
"Things that have been abused and punished have people beginning to think how things will look a year from now," says Stephen Wood, senior portfolio manager at Russell Investments.
The market pockets that showed the biggest positive reactions to the Fed's surprise rate cut included:
•Retailing. The clearest winners were retailers, as traders figured consumers would keep spending if the rate cut reduced the severity of a recession or prevented one, says Jennifer Ellison of money-management firm Bingham Osborn & Scarborough.
•Financials. Shares of battered mortgage insurers and banks skyrocketed Tuesday as investors hoped lower interest rates would boost demand for loans and reduce strain on the financial system.
The Select Sector SPDR-Financial exchange traded fund that tracks the industry rose 2.2%. Some individual stocks turned in more impressive gains. Mortgage insurers MBIA mbi and Ambac abk jumped $3.98, or 47%, to $12.53 and $1.77, or 29%, to $7.97, respectively. Large banks such as Bank of America bac gained 4%, but regional banks soared. KeyCorp key rose $2.65, or 13%, to $23.75.
Investors realize the rate cut's positive effects are aimed squarely at the banks, Ellison says. "Banks are the direct recipient of the gift from the Fed," she says.
•Real estate investment trusts. REITs, which own and manage commercial properties, bounced back on hopes demand for offices and retail space would strengthen. The iShares Cohen & Steers Realty Majors ETF gained 2.7%. Since they peaked last year, REITs had lost 39% of their value until Tuesday, making them one of the hardest hit areas of the market.
Investors shouldn't delude themselves into thinking vulnerable industries are in the clear, though, says Brian Belski, U.S. sector strategist at Merrill Lynch. Much of the gains resulted from bearish "short" investors scrambling to close their bets by buying stocks, says David Reilly of Rydex Investments. "It's too early to say investors are comfortable and it's time to get in."
That's especially true for financial stocks, Belski says. The sector historically underperforms the month after a surprise rate cut. And the sector's fourth-quarter earnings are expected to be down 95%, he says. Indeed, Bank of America and Wachovia wb on Tuesday reported earnings down more than 90%.
Similarly, investors may also be giving up on health care stocks too soon, as the sector benefits most in the uneasy times following a surprise rate cut. "Everyone is looking for the bottom," Belski says. "But one day isn't enough for you to act on."