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The U.S. economy and market are abuzz with high inflation. As far as the latest data are concerned, annual inflation rate in the United States slowed to 8.3% in April from a 41-year high of 8.5% in March, per tradingeconomics, but less than market forecasts of 8.1% (read: 5 Sector ETFs to Win from a 8%+ U.S. Inflation).
Energy prices surged 30.3%, below 32% in March thanks to a moderate rise in gasoline prices (43.6% versus 48%) while fuel oil increased more (80.5% versus 70.1%). On the other hand, food prices jumped 9.4%, the maximum since April 1981 and prices also rose faster for shelter (5.1% versus 5%) and new vehicles (13.2% versus 12.5%).
While this inflation data sparked rising rate concerns amid a falling stock market, history suggests that inflation has not been a problem for equities. Goldman analysts said history indicates the market will react positively when inflation shows signs of peaking, as quoted on a CNBC article.
“The market usually falls in the run up to the peak in headline inflation, just as we have seen in recent months,” a team of analysts led by Sharon Bell said in a note. “But after the peaks, there is a little more variance and on average the market does recover,” the CNBC article went on to highlight.
In the previous 13 inflation rally since 1951, the market was higher 12 months later nine times. The biggest gain was a 33.2% increase from the March 1980 top, per that article. Even if there are steady rate hikes, we see no need to fear rising rate risks. The last full cycle of rate increases happened in the United States between June 2004 and June 2006 as rates progressively rose from 1.00% to 5.25%.
Wall Street bull Ed Yardeni noted last year that the current market conditions are likely to increase the benchmark 10-year Treasury Note yield between 2.5% and 3% within the next 12 to 18 months. The economy and stock market are pretty strong to digest the increases in rates, per Ed Yardeni. He also expected growing productivity and technological innovation to keep cost pressures low and inflation tamed.
Cyclical Sectors to Sizzle?
Historically, cyclical sectors outperform the defensive ones when rates normalize. In a growing economy, most sectors surge from a wealth effect, with a few of the more cyclical corners making the most of the rally. These industries often sag in a slumping economy but are the biggest winners during a revival.
An industrial boom is apparent in the U.S. economy, thanks to Biden’s infrastructure plans. The sector has suffered massively amid the pandemic. The latest recruitment pattern in the sector also calls for optimism.
The materials space is expected to remain strong due to growing demand for industrialization. The passage of the much-awaited $1.2-trillion infrastructure bill are pointing toward more demand for the sector.
A rising rate environment will lead to a favorable operating environment for financial stocks. Also, banking stocks offer value now. Banking stocks are highly cyclical as these are vulnerable to changes in economic conditions and policies.
The sector is likely to benefit from the rising income levels of consumers. Despite high inflation, consumer spending remains strong. More people are getting vaccinated and business prospects have grown with easing restrictions.
The ebbing pandemic and economic reopening are plus points for the transportation sector. The industry has been enjoying continued strong demand with improvements in the supply chain. Delays still exist, but supply chain issues are slowly improving. This can be viewed as a ray of hope.
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Why Fear High Inflation? Play Cyclical ETFs
The U.S. economy and market are abuzz with high inflation. As far as the latest data are concerned, annual inflation rate in the United States slowed to 8.3% in April from a 41-year high of 8.5% in March, per tradingeconomics, but less than market forecasts of 8.1% (read: 5 Sector ETFs to Win from a 8%+ U.S. Inflation).
Energy prices surged 30.3%, below 32% in March thanks to a moderate rise in gasoline prices (43.6% versus 48%) while fuel oil increased more (80.5% versus 70.1%). On the other hand, food prices jumped 9.4%, the maximum since April 1981 and prices also rose faster for shelter (5.1% versus 5%) and new vehicles (13.2% versus 12.5%).
While this inflation data sparked rising rate concerns amid a falling stock market, history suggests that inflation has not been a problem for equities. Goldman analysts said history indicates the market will react positively when inflation shows signs of peaking, as quoted on a CNBC article.
“The market usually falls in the run up to the peak in headline inflation, just as we have seen in recent months,” a team of analysts led by Sharon Bell said in a note. “But after the peaks, there is a little more variance and on average the market does recover,” the CNBC article went on to highlight.
In the previous 13 inflation rally since 1951, the market was higher 12 months later nine times. The biggest gain was a 33.2% increase from the March 1980 top, per that article. Even if there are steady rate hikes, we see no need to fear rising rate risks. The last full cycle of rate increases happened in the United States between June 2004 and June 2006 as rates progressively rose from 1.00% to 5.25%.
Wall Street bull Ed Yardeni noted last year that the current market conditions are likely to increase the benchmark 10-year Treasury Note yield between 2.5% and 3% within the next 12 to 18 months. The economy and stock market are pretty strong to digest the increases in rates, per Ed Yardeni. He also expected growing productivity and technological innovation to keep cost pressures low and inflation tamed.
Cyclical Sectors to Sizzle?
Historically, cyclical sectors outperform the defensive ones when rates normalize. In a growing economy, most sectors surge from a wealth effect, with a few of the more cyclical corners making the most of the rally. These industries often sag in a slumping economy but are the biggest winners during a revival.
Industrials – Industrial Select Sector SPDR ETF (XLI - Free Report)
An industrial boom is apparent in the U.S. economy, thanks to Biden’s infrastructure plans. The sector has suffered massively amid the pandemic. The latest recruitment pattern in the sector also calls for optimism.
Basic Materials – Materials Select Sector SPDR ETF (XLB - Free Report)
The materials space is expected to remain strong due to growing demand for industrialization. The passage of the much-awaited $1.2-trillion infrastructure bill are pointing toward more demand for the sector.
Financials – SPDR S&P Bank ETF (KBE - Free Report)
A rising rate environment will lead to a favorable operating environment for financial stocks. Also, banking stocks offer value now. Banking stocks are highly cyclical as these are vulnerable to changes in economic conditions and policies.
Consumer Discretionary – Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report)
The sector is likely to benefit from the rising income levels of consumers. Despite high inflation, consumer spending remains strong. More people are getting vaccinated and business prospects have grown with easing restrictions.
Transportation – SPDR S&P Transportation ETF (XTN - Free Report)
The ebbing pandemic and economic reopening are plus points for the transportation sector. The industry has been enjoying continued strong demand with improvements in the supply chain. Delays still exist, but supply chain issues are slowly improving. This can be viewed as a ray of hope.