Three factors have been pulling the strings of Wall Street now – Inflation, Fed policy tightening and Omicron. Due to supply-chain issues, inflation is rising fast. Wholesale prices in the United States are now at the highest levels since November 2010.
The Consumer Price Index soared at the fastest clip since 1982. This has led to a hawkish Fed. Meanwhile, COVID-19 continues to mutate leaving the world to fight with the latest variant Omicron. Thankfully, available data shows Omicron is less virulent than the previous strains.
This is the scenario that Wall Street is dealing with this winter. Let’s delve a little deeper:
Fed Speeds Up QE Tapering
As expected, the Fed has paced up QE tapering to contain sky-high inflation. Fed Chairman Jerome Powell said in his post FOMC statement that the central bank will raise the tapering of the monthly bond-buy program. The central bank plans to buy $60 billion per month of bonds in combined Treasuries and agency mortgage-backed securities starting in January, down from $90 billion in December and $120 billion from the start of the pandemic through November.
U.S. GDP Growth Projections Upped for 2022
The central bank also upped its economic growth projections. Per the Fed’s latest Summary of Economic Projections, the U.S. economy is anticipated to grow at a 4% rate for 2022, up from the previously mentioned 3.8%. The pace of growth is then expected to cool down over the following two years, with 2.2% growth for 2023 and 2% for 2024.
Inflationary Expectations Upped for 2022
The central bank raised its inflation outlook for 2021 and 2022. It expects inflation to rise 5.3% in 2021, up from the previous forecast of 4.2%, and 2.6% in 2022, up from 2.2% issued in September. The unemployment rate in 2022 is predicted to be 3.5%, down from the previously mentioned 3.8%.
At Least One Fed Rate Hike Sure-Shot in 2022; Max Three Possible
The meeting projections revealed that 12 out of 18 FOMC members expect at least three rate increases next year. This marks an increase from September’s forecast, where half of the Fed members saw at least one hike in 2022. All 18 policymakers have also indicated the possibility of at least one rate hike before 2022 end. Interest rates, which have been low since March 2020, might climb to 2.1% by 2024 end.
What Should Be Your Investment Stance?
Santa Claus rallies typically begin from the middle of December. So, the time has come to make the best use of your savings via Wall Street investments. Below, we highlight a few ETF investment options.
First Trust Morningstar Dividend Leaders ETF ( FDL Quick Quote FDL - Free Report)
Dividends should be winning bets right now as uncertainties prevail regarding interest rate movements and virus concerns. If rates rise, high dividend investing would be helpful for investors to make up for the higher yields. The underlying Morningstar Dividend Leaders Index of FDL consists of stocks that have shown dividend consistency and dividend sustainability. The dividend yield of FDL is 3.53% annually, way higher than the benchmark U.S. treasury yield of 1.44%, as of Dec 16, 2021.
iShares Evolved U.S. Innovative Healthcare ETF ( IEIH Quick Quote IEIH - Free Report)
As long as the virus threat is around us, extra focus on healthcare stocks is warranted and these should be up for gains. U.S. healthcare spending increased by 9.7% (biggest in about two decades) in 2020 to touch
$4.1 trillion mainly due to the impacts of the COVID-19 pandemic. As a result of the steep increase, healthcare’s share of gross domestic product recorded a considerable increase from 17.6% in 2019 to 19.7% (largest on record) in 2020. Value ETF Vanguard ( VTV Quick Quote VTV - Free Report)
This is yet another time-sensitive pick. Value stocks perform better in a rising rate environment. Plus, value stocks are supposedly undervalued than the growth stocks currently as the latter was in the high-flier zone in the peak of the pandemic.
Real Estate Select Sector SPDR ETF ( XLRE Quick Quote XLRE - Free Report)
Home prices have been uphill due to higher demand and an uptrend in inflation. Thanks to rising home prices, affordability is falling. Demand for renting has been increasing, which in turn is giving a push to shelter costs. This means exposure to real estate could be inflation-beating. Interest rates are still at pretty low levels, which make real estate investing lucrative.
Invesco S&P 500 Equal Weight Consumer Staples ETF ( RHS Quick Quote RHS - Free Report)
Food-at-home inflation is rising faster than food-away-from home inflation, indicating the hot groceries market. Consumer staples normally pass on cost increases to consumers to maintain profit margin. With consumer staples being a non-cyclical sector, the sheer necessities of staples can’t even deter consumers from buying those goods. Hence, the sector should hold up well in the current phase of uncertainties.