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Biggest U.S. Rate Hike Since 1994 in June: 4 ETFs to Win
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Wall Street has been on a choppy ride since the start of 2022 due to rising rate worries. The S&P 500 entered a bear market on Jun 13. The bets of a 75-bp Fed rate hike this week amid sky-high inflation, the ECB’s looming hawkish stance, the Russia-Ukraine war, soaring energy prices and a renewed surge in COVID cases in countries like the United Kingdom and China have sent stocks into the bear market this time around.
In line with the market expectations, the Federal Reserve increased its benchmark interest rate by 75 bps yesterday. This marked the biggest hike since 1994 in the United States. The Fed signaled it will keep hiking rates aggressively this year to restrain the red-hot inflation.
The evident outcome is a slowdown in economic growth. The Fed downgraded its forecast for 2022 median real GDP growth from 2.8% in March to 1.7% for 2022. It also lowered the growth rate expectations to 1.7% (from 2.2% in March) for 2023 and 1.9% (from 2% in March) for 2024. Unemployment rate is projected to rise from 3.5% to 3.7% for 2022, 3.5% to 3.9% for 2023 and from 3.6% to 4.1% for 2024.
The inflation projection is upped for this year, while the Fed expects inflation to cool off in 2023 and 2024. The federal funds rate is projected to be 3.4% for 2022 from 1.9% in March, 3.8% for 2023 from 2.8% and 3.4% for 2024 from 2.8%.
Recession Down the Line?
All of these sparked a safe-haven rally and led the benchmark 10-year U.S. Treasury yield to fall to 3.33% on Jun 15 from 3.49% on Jun 14. Yields fell across the yield curve except for one-month and two-month timeframes. Of late, the yield curve has also inverted.
Notably, if the growth slowdown remains rife, there must be a safe-haven rally and long-term bond yields would be subdued. In that case, beaten-down stocks will see a reason to rally. 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.
ETFs to Tap
Against this backdrop, below we highlight a few top-ranked ETFs [Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy)] that could soar higher in the current backdrop.
Dividend aristocrats are blue-chip dividend-paying companies with a long track record of increasing dividend payments year over year. As a result, these stocks offer a safer exposure.
It is the most battered area and hence is likely to bounce back faster amid a market recovery. Historically, the 10-3 tends to compress when the Fed hikes rates. The latest fear of recession will also keep the surge in long-term bond yields in check, a plus for growth sectors like technology.
Amid a rising rate environment, banking stocks may gain. However, if the yield flattens, then banking stocks may not gain much, but the steepening yield curve is a plus for the segment.
Health Care Select Sector SPDR ETF (XLV - Free Report) – Zacks Rank: #1
The healthcare sector is a good defensive investment option. Currently, the Russia-Ukraine war crisis and the Fed’s hawkish stance on rate hikes as well as the pandemic triggered a race to introduce vaccines, tests and treatment options, placing the healthcare sector in a sweet spot.
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Biggest U.S. Rate Hike Since 1994 in June: 4 ETFs to Win
Wall Street has been on a choppy ride since the start of 2022 due to rising rate worries. The S&P 500 entered a bear market on Jun 13. The bets of a 75-bp Fed rate hike this week amid sky-high inflation, the ECB’s looming hawkish stance, the Russia-Ukraine war, soaring energy prices and a renewed surge in COVID cases in countries like the United Kingdom and China have sent stocks into the bear market this time around.
In line with the market expectations, the Federal Reserve increased its benchmark interest rate by 75 bps yesterday. This marked the biggest hike since 1994 in the United States. The Fed signaled it will keep hiking rates aggressively this year to restrain the red-hot inflation.
The evident outcome is a slowdown in economic growth. The Fed downgraded its forecast for 2022 median real GDP growth from 2.8% in March to 1.7% for 2022. It also lowered the growth rate expectations to 1.7% (from 2.2% in March) for 2023 and 1.9% (from 2% in March) for 2024. Unemployment rate is projected to rise from 3.5% to 3.7% for 2022, 3.5% to 3.9% for 2023 and from 3.6% to 4.1% for 2024.
The inflation projection is upped for this year, while the Fed expects inflation to cool off in 2023 and 2024. The federal funds rate is projected to be 3.4% for 2022 from 1.9% in March, 3.8% for 2023 from 2.8% and 3.4% for 2024 from 2.8%.
Recession Down the Line?
All of these sparked a safe-haven rally and led the benchmark 10-year U.S. Treasury yield to fall to 3.33% on Jun 15 from 3.49% on Jun 14. Yields fell across the yield curve except for one-month and two-month timeframes. Of late, the yield curve has also inverted.
Notably, if the growth slowdown remains rife, there must be a safe-haven rally and long-term bond yields would be subdued. In that case, beaten-down stocks will see a reason to rally. 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.
ETFs to Tap
Against this backdrop, below we highlight a few top-ranked ETFs [Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy)] that could soar higher in the current backdrop.
Vanguard Dividend Appreciation ETF (VIG - Free Report) – Zacks Rank #1
Dividend aristocrats are blue-chip dividend-paying companies with a long track record of increasing dividend payments year over year. As a result, these stocks offer a safer exposure.
Technology Select Sector SPDR ETF (XLK - Free Report) – Zacks Rank #1
It is the most battered area and hence is likely to bounce back faster amid a market recovery. Historically, the 10-3 tends to compress when the Fed hikes rates. The latest fear of recession will also keep the surge in long-term bond yields in check, a plus for growth sectors like technology.
Financials – SPDR S&P Bank ETF (KBE - Free Report) – Zacks Rank #1
Amid a rising rate environment, banking stocks may gain. However, if the yield flattens, then banking stocks may not gain much, but the steepening yield curve is a plus for the segment.
Health Care Select Sector SPDR ETF (XLV - Free Report) – Zacks Rank: #1
The healthcare sector is a good defensive investment option. Currently, the Russia-Ukraine war crisis and the Fed’s hawkish stance on rate hikes as well as the pandemic triggered a race to introduce vaccines, tests and treatment options, placing the healthcare sector in a sweet spot.