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Fed to Start QE Taper: Is It Time for Cyclical Sector ETFs?
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Signs of a recovery, albeit moderate, in the U.S. economy, are now evident. Rising inflation, fast-improving corporate earnings, moderate retail sales and last but not the least still-zero benchmark interest rates have been fueling optimism in the market. Still, rising rate concerns thanks to the Fed’s latest plan for QE tapering may dampen the Wall Street rally occasionally.
Should You Worry?
Probably not. Wall Street has been on a winning streak lately due to upbeat corporate earnings. Investors seem to have priced in the Fed tapering move. “In light of the substantial further progress the economy has made toward the committee’s goals since last December, the Committee decided to begin reducing the monthly pace of its net asset purchases,” the policy-setting Federal Open Market Committee said in its updated policy statement on Nov 3. As of now, the Fed is purchasing about $120 billion worth of bonds per month.
But the Fed said that it will gradually slow the pace of those purchases by about $15 billion per month, as part of a plan to bring its so-called quantitative easing program to a total stop by the middle of next year. The taper will start “later this month” and will continue at the $15 billion clip through December, although the change of the pace can happen should the need be.
The U.S. benchmark treasury yield has moved up to 1.60% on Nov 3 in response to the Fed’s plan to start QE taring from this month. The yield is up from 0.93% at the start of the year. Still, the magnitude says that the value of yield is not strong enough to cause stock market crashes. In 2013, the U.S. benchmark treasury yield started the year with 1.86% while it ended with 3.04%. Notably, in 2013, the S&P 500 gained 30%.
Investment firm UBS sees the S&P 500 2022 year-end target as 5,000 suggesting an 8% gain from where it is currently standing.
Will Cyclical Sectors Sizzle?
Historically, cyclical sectors outperform the defensive ones when rates normalize. In a growing economy, most sectors surge on 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. Cyclical sectors like energy, financials, materials and consumer discretionary should do better in the coming days.
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. Consumer confidence has improved as more people are getting vaccinated and business prospects have grown with many states easing restrictions. Improving labor market prospects outweighed the inflation fears.
iShares U.S. Oil & Gas Exploration & Production ETF (IEO - Free Report)
Global energy demand is rising fast with the pandemic giving signs of retreating slowly. The rise in global energy demand has been prevalent. The global supply of renewables will increase by 35 gigawatts from 2021 to 2022, but global power demand growth will go up by 100 gigawatts over the same period, according to Boyle, as quoted on CNBC.
Moreover, global electricity demand is set to bounce back strongly, rising about 5% this year and will likely increase by 4% in 2022, according to the IEA. All these indicate that the demand for fossil fuel will also be higher in the medium term. This is especially true given that the capex on oil and gas has diminished.
Invesco DWA Basic Materials Momentum ETF (PYZ - Free Report)
Rising global activities mean higher demand for materials. The composite materials market is expected to increase by $29.24 billion from 2020 to 2025, progressing at a CAGR of 5.68%, according to the latest report by Technavio. Various other kind of materials have also been registering an uptrend in demand, in tandem with the economic recovery.
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Fed to Start QE Taper: Is It Time for Cyclical Sector ETFs?
Signs of a recovery, albeit moderate, in the U.S. economy, are now evident. Rising inflation, fast-improving corporate earnings, moderate retail sales and last but not the least still-zero benchmark interest rates have been fueling optimism in the market. Still, rising rate concerns thanks to the Fed’s latest plan for QE tapering may dampen the Wall Street rally occasionally.
Should You Worry?
Probably not. Wall Street has been on a winning streak lately due to upbeat corporate earnings. Investors seem to have priced in the Fed tapering move. “In light of the substantial further progress the economy has made toward the committee’s goals since last December, the Committee decided to begin reducing the monthly pace of its net asset purchases,” the policy-setting Federal Open Market Committee said in its updated policy statement on Nov 3. As of now, the Fed is purchasing about $120 billion worth of bonds per month.
But the Fed said that it will gradually slow the pace of those purchases by about $15 billion per month, as part of a plan to bring its so-called quantitative easing program to a total stop by the middle of next year. The taper will start “later this month” and will continue at the $15 billion clip through December, although the change of the pace can happen should the need be.
The U.S. benchmark treasury yield has moved up to 1.60% on Nov 3 in response to the Fed’s plan to start QE taring from this month. The yield is up from 0.93% at the start of the year. Still, the magnitude says that the value of yield is not strong enough to cause stock market crashes. In 2013, the U.S. benchmark treasury yield started the year with 1.86% while it ended with 3.04%. Notably, in 2013, the S&P 500 gained 30%.
Investment firm UBS sees the S&P 500 2022 year-end target as 5,000 suggesting an 8% gain from where it is currently standing.
Will Cyclical Sectors Sizzle?
Historically, cyclical sectors outperform the defensive ones when rates normalize. In a growing economy, most sectors surge on 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. Cyclical sectors like energy, financials, materials and consumer discretionary should do better in the coming days.
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. Consumer confidence has improved as more people are getting vaccinated and business prospects have grown with many states easing restrictions. Improving labor market prospects outweighed the inflation fears.
iShares U.S. Oil & Gas Exploration & Production ETF (IEO - Free Report)
Global energy demand is rising fast with the pandemic giving signs of retreating slowly. The rise in global energy demand has been prevalent. The global supply of renewables will increase by 35 gigawatts from 2021 to 2022, but global power demand growth will go up by 100 gigawatts over the same period, according to Boyle, as quoted on CNBC.
Moreover, global electricity demand is set to bounce back strongly, rising about 5% this year and will likely increase by 4% in 2022, according to the IEA. All these indicate that the demand for fossil fuel will also be higher in the medium term. This is especially true given that the capex on oil and gas has diminished.
Invesco DWA Basic Materials Momentum ETF (PYZ - Free Report)
Rising global activities mean higher demand for materials. The composite materials market is expected to increase by $29.24 billion from 2020 to 2025, progressing at a CAGR of 5.68%, according to the latest report by Technavio. Various other kind of materials have also been registering an uptrend in demand, in tandem with the economic recovery.