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Wall Street has been on choppy ride since the start of 2022 due to rising rate worries. Fed Chairman Jerome Powell this week said the central bank is committed to raising rates “expeditiously” to tame inflation. Investors took the statement as an interest rate hike of 50 basis points in May as inflation is at a 40-year high. “It’s absolutely essential to restore price stability,” Powell added, per a CNBC article.
Reacting to the Powell’s comments, the yield on the benchmark 10-year Treasury note jumped 5 basis points to 2.90% on Apr 21 from the day earlier. Notably, the benchmark treasury yield was 2.39% at the start of the month.
Should You Fear Faster Rate Hike?
Signs of a recovery in the U.S. economy, though not brisk in every area, are surely more than what we saw last year. Per a Reuters article, big U.S. banks believe that the current spending patterns indicate consumers’ wellbeing. Healthy consumers having cash in the bank, are looking forward to spending as well as borrowing.
Although stocks are overvalued by some measure, an influence of consumers’ prosperity on the stock market will only be natural. Yes, stocks may also slip due to the fear of gradual creases in cheap dollar inflows. But, this hiccup maybe short term in nature.
CNBC’s Jim Cramer recently said that in 1994 when the Fed doubled rates, stocks rallied. In the recent past, we have seen stocks withstanding even the 3% benchmark yield. For instance, the benchmark U.S. treasury yield touched 3.24% on Nov 8, 2018, having started the year at 2.46%. If we track the performance of the S&P 500 growth ETF (SPYG - Free Report) , we will see the fund returning 10.3% during that period while the value ETF (SPYV - Free Report) was down 0.5%.
Against this backdrop, below we highlight a few sector ETFs that tend to win in a rising rate environment.
Talks about the steeper Fed rate hike in May have boosted the space lately. The steepening of the yield curve is a tailwind for banking stocks as these improve banks' net interest margins. This is because the interest rates on deposits are usually tied to short-term rates while loans are often tied to long-term rates.
The consumer sector is cyclical in nature. The sector can be considered a barometer of rising income levels of consumers of an economy. However, online consumer ETFs performed well in the peak of lockdown phase. With the economic reopening gaining ground now, we expect stay-at-home stocks to underperform and move-out-of-home stocks to take an upper hand now.
The industrials and materials sectors too are likely to perform better in a rising rate environment. As the U.S. manufacturing data are coming in upbeat, the industrial sector should hold up well. The ISM Manufacturing PMI for the United States though fell to 57.1 in March of 2022 from 58.6 in February, the data pointed out strong growth. This, in turn, would boost the demand for materials. Investors should note that material prices have been steady in recent months.
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A 50-Bp Rate Hike in May? Sector ETFs to Win
Wall Street has been on choppy ride since the start of 2022 due to rising rate worries. Fed Chairman Jerome Powell this week said the central bank is committed to raising rates “expeditiously” to tame inflation. Investors took the statement as an interest rate hike of 50 basis points in May as inflation is at a 40-year high. “It’s absolutely essential to restore price stability,” Powell added, per a CNBC article.
Reacting to the Powell’s comments, the yield on the benchmark 10-year Treasury note jumped 5 basis points to 2.90% on Apr 21 from the day earlier. Notably, the benchmark treasury yield was 2.39% at the start of the month.
Should You Fear Faster Rate Hike?
Signs of a recovery in the U.S. economy, though not brisk in every area, are surely more than what we saw last year. Per a Reuters article, big U.S. banks believe that the current spending patterns indicate consumers’ wellbeing. Healthy consumers having cash in the bank, are looking forward to spending as well as borrowing.
Although stocks are overvalued by some measure, an influence of consumers’ prosperity on the stock market will only be natural. Yes, stocks may also slip due to the fear of gradual creases in cheap dollar inflows. But, this hiccup maybe short term in nature.
CNBC’s Jim Cramer recently said that in 1994 when the Fed doubled rates, stocks rallied. In the recent past, we have seen stocks withstanding even the 3% benchmark yield. For instance, the benchmark U.S. treasury yield touched 3.24% on Nov 8, 2018, having started the year at 2.46%. If we track the performance of the S&P 500 growth ETF (SPYG - Free Report) , we will see the fund returning 10.3% during that period while the value ETF (SPYV - Free Report) was down 0.5%.
Against this backdrop, below we highlight a few sector ETFs that tend to win in a rising rate environment.
Financials – Financial Select Sector SPDR Fund (XLF - Free Report)
Talks about the steeper Fed rate hike in May have boosted the space lately. The steepening of the yield curve is a tailwind for banking stocks as these improve banks' net interest margins. This is because the interest rates on deposits are usually tied to short-term rates while loans are often tied to long-term rates.
Consumer Discretionary – Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report)
The consumer sector is cyclical in nature. The sector can be considered a barometer of rising income levels of consumers of an economy. However, online consumer ETFs performed well in the peak of lockdown phase. With the economic reopening gaining ground now, we expect stay-at-home stocks to underperform and move-out-of-home stocks to take an upper hand now.
Materials – Materials Select Sector SPDR Fund (XLB - Free Report)
The industrials and materials sectors too are likely to perform better in a rising rate environment. As the U.S. manufacturing data are coming in upbeat, the industrial sector should hold up well. The ISM Manufacturing PMI for the United States though fell to 57.1 in March of 2022 from 58.6 in February, the data pointed out strong growth. This, in turn, would boost the demand for materials. Investors should note that material prices have been steady in recent months.