The Fed sent a shock wave through the market last week.
Last Wednesday, Fed chairman Jerome Powell said that the economy “is in a good place” but he and his colleagues also said that growth in the U.S. looks to be slowing from last year, and downgraded their outlook for GDP to 2.1% in 2019 from 2.3%. Their outlook for 2020 is even more bleak, with the Fed projecting growth to drop to just 1.9%.
They also signaled no rate hikes for 2019 after having projected at least two rate hikes for the year just this past December.
The news spooked the market and spurred ongoing fears of an imminent recession. What followed was an inversion of the 3-month Treasury bill and the 10-year note curve, which sent many investors into panic mode.
According to CNBC host and Real Money founder Jim Cramer, investors now need to prepare for a “sea change because it is dramatic and requires, if your are a trader, to change direction and own a whole different group of stocks because the low-to-no growth force is now with you.”
Cramer says that in an environment where there is no growth tailwind coming from the economy, investors should look for those companies that “have the greatest growth because there is almost no inflation so companies that have the ability to have tremendous profits in the out years—think the cloud kings or companies like the very-soon-to-come-public Lyft or Uber or Airbnb—are especially good.”
As for specific stocks, Cramer likes Amazon (NASDAQ: AMZN) and Apple (NASDAQ: AAPL), cloud stocks Salesforce.com (NYSE: CRM), ServiceNow (NYSE: NOW), and Twilio (NYSE: TWLO), and semiconductor stocks Nvidia (NASDAQ: NVDA), Advanced Micro Devices (NASDAQ: AMD), Micron (NASDAQ: MU), and Lam Research (NASDAQ: LRCX).
While expensive, Cramer says that cloud stocks are the highest growth stocks right now and “aren’t particularly economically sensitive.” Of the three cloud stocks Cramer mentioned, analysts say Salesforce.com could see the most upside this year. Analysts have a consensus Buy rating on the stock and a twelve-month price target of $178.41, suggesting possible upside of 15%. Earlier this month, Raymond James rated CRM a Strong Buy and boosted their price target to $200 – 29% higher than Thursday’s closing price.
Cramer expects 2020 to be a good year for chip stocks as customers should start putting in orders later on this year. AMD got a boost last week after Google (NASDAQ: GOOGL, GOOG) confirmed that it had chosen the chip maker to power its new gaming platform’s, Stadia, cloud-based graphics rendering. The news sent AMD shares soaring 12% in a day, and the stock is currently up nearly 36% so far this year.
As for safer growth stocks, Cramer likes PepsiCo (NASDAQ: PEP) for its 3% dividend yield and product pipeline, as well as General Mills (NYSE: GIS) with its 3.8% yield, though says investors should wait for a pull-back before buying.
Cramer warned investors to stay away from bank stocks saying, “The economy isn’t strong enough to entertain big construction. The net interest margin isn’t going anywhere. Bad loans should start showing up. It’s just a bad situation until they become higher yielding.”