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Wall Street has been on choppy ride since the start of 2022 due to rising rate worries and geopolitics. The 10-year U.S. Treasury yield hit a multi-year high on Mar 22 on Federal Reserve Chair Jerome Powell’s comments on rate hikes.
Powell on Monday said, “inflation is much too high,” in a speech for the National Association for Business Economics, as quoted on CNBC. The central bank chief stressed that the Fed would continue to hike interest rates until inflation comes under control and those hikes could be more aggressive than forecast, the CNBC article noted.
“If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so,” said Powell. As a result, rates started surging. Goldman Sachs on Monday raised its forecast to 50 basis point hikes at the May and June Fed meetings, the CNBC article reported.
Higher inflationary expectations emanating from supply chain disruptions as well as higher crude prices made Fed members comfortable with this kind of aggressive rate hike cycle. Notably, the Fed had enacted its first rate hike this month since the start of the pandemic.
Should You Fear 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.
Against this backdrop, below we highlight a few sector ETFs that tend to win in a rising rate environment.
Talks about the faster Fed rate hikes should boost the space. 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 the lockdown phase. With the economic reopening gaining ground now, we expect move-out-of-home stocks should also remain healthy. XLY is a nice mix of both online and offline retail stocks.
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. U.S. economic activity in the manufacturing sector grew in February, with the overall economy marking the 21st successive month of growth. This, in turn, would boost the demand for materials. Investors should note that material prices have been steady in recent months (read: 4 Sector ETFs to Bet Big on Upbeat U.S. Manufacturing Data).
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U.S. Yields Surging: Sector ETFs to Win
Wall Street has been on choppy ride since the start of 2022 due to rising rate worries and geopolitics. The 10-year U.S. Treasury yield hit a multi-year high on Mar 22 on Federal Reserve Chair Jerome Powell’s comments on rate hikes.
Powell on Monday said, “inflation is much too high,” in a speech for the National Association for Business Economics, as quoted on CNBC. The central bank chief stressed that the Fed would continue to hike interest rates until inflation comes under control and those hikes could be more aggressive than forecast, the CNBC article noted.
“If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so,” said Powell. As a result, rates started surging. Goldman Sachs on Monday raised its forecast to 50 basis point hikes at the May and June Fed meetings, the CNBC article reported.
Higher inflationary expectations emanating from supply chain disruptions as well as higher crude prices made Fed members comfortable with this kind of aggressive rate hike cycle. Notably, the Fed had enacted its first rate hike this month since the start of the pandemic.
Should You Fear 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.
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 faster Fed rate hikes should boost the space. 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 ETF (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 the lockdown phase. With the economic reopening gaining ground now, we expect move-out-of-home stocks should also remain healthy. XLY is a nice mix of both online and offline retail stocks.
Materials – iShares U.S. Basic Materials ETF (IYM - 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. U.S. economic activity in the manufacturing sector grew in February, with the overall economy marking the 21st successive month of growth. This, in turn, would boost the demand for materials. Investors should note that material prices have been steady in recent months (read: 4 Sector ETFs to Bet Big on Upbeat U.S. Manufacturing Data).