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The outcome of the latest Fed meeting which reinforced the need for faster Fed rate hikes to counter accelerating inflation, caused an inverted yield curve last week. The latest Fed meeting held on Mar 16 came across as hawkish.
The Federal Reserve raised interest rates by a quarter of a percentage point and projected that its policy rate would be in the range of 1.75% and 2% by the year's end in a newly aggressive stance to fight the red-hot inflation.
Hence, new Federal Reserve projections indicate six more rate hikes this year, per CNBC. The Fed downgraded its forecast for 2022 median real GDP growth from 4% in December to 2.8% for 2022. However, it kept the growth rate expectations same at 2.2% for 2023 and 2% for 2024.
Inversion of Yield Curve, But Recession Fears Seem Exaggerated
Uncertainties and global growth worries sparked a safe-haven rally and led the benchmark 10-year U.S. Treasury yield to drop to 2.38% on Apr 1 from 2.48% from Mar 25. The spread between benchmark U.S. treasury yield and the three-year treasury yield were negative 20 bps on Apr 1.
When the curve inverts, “there has been a better than two-thirds chance of a recession at some point in the next year and a greater than 98% chance of a recession at some point in the next two years,” according to Bespoke, as quoted on CNBC.
There is often a long gap between the first inversion of the yield curve and the real occurrence of recession. The CNBC article quoted that Evercore ISI sees a 25% chance of a U.S. recession. According to MUFG Securities, the yield curve inverted 422 days ahead of the 2001 recession, 571 days ahead of the 2007-to-2009 recession and 163 days before the 2020 recession, as quoted on a CNBC article.
Moreover, we don’t expect the inversion of yield curve to prolong. Federal Reserve Governor Lael Brainard said the Federal Open Market Committee (FOMC) was "prepared to take stronger action" should already elevated indicators of inflation rates and expectations warrant such moves.
This suggests faster rate hikes and a very rapid drawdown of the Fed’s balance sheet — which has ballooned nearly $9 trillion — than in previous periods. As a result, 10-year U.S. treasury yield touched 2.54% on Apr 5, up from 2.39% recorded on Apr 1. However, three-year yield is still higher at 2.69% as of Apr 5.
ETFs to Tap
Against this backdrop, below we highlight a few top-ranked sector ETFs (Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy)) that beat the S&P 500 (up 3.6%) past month.
First Trust Materials AlphaDEX ETF (FXZ - Free Report) – Up 12.6% Past Month; P/E: 7.50X; Zacks Rank: #1
The materials space has remained strong as the accelerated coronavirus vaccine rollout and the passage of the $1.2-trillion U.S. infrastructure bill are favoring the sector. However, the latest tailwind is the escalating tension between Russia and Ukraine that is aiding materials’ prices. Both countries are metal-rich. As prices of various materials have been on the rise, the material sector has been witnessing solid growth.
Vanguard Energy ETF (VDE - Free Report) – Up 10.4% Past Month; Zacks Rank: #2
Oil prices have been rising since the beginning of 2022. The upside in crude oil prices was triggered by factors like easing Omicron variant concerns, supply shortages, and geopolitical tensions in Eastern Europe and the Middle East.
iShares U.S. Infrastructure ETF (IFRA - Free Report) – Up 8.15% Past Month; Zacks Rank: #2
The fund taps U.S. companies that have infrastructure exposure and that could benefit from a potential increase in domestic infrastructure activities. The passage of the $1.2-trillion worth of U.S. infrastructure bill is a plus for the space.
Health Care Select Sector SPDR ETF (XLV - Free Report) – Up 7.16% Past Month; 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 Plus, the pandemic also triggered a race to introduce vaccines, tests and treatment options, placing the healthcare sector in a sweet spot.
VanEck Semiconductor ETFSMH – Up 5% Past Month; Zacks Rank: #1
The demand for semiconductors has been very strong in the recent months. There has been a supply crunch of chips. Hence, high demand will the space charged-up in the coming days (read: 4 Sector ETFs to Bet Big On Despite Subdued Manufacturing Data).
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5 Sector ETFs to Tap for Q2
The outcome of the latest Fed meeting which reinforced the need for faster Fed rate hikes to counter accelerating inflation, caused an inverted yield curve last week. The latest Fed meeting held on Mar 16 came across as hawkish.
The Federal Reserve raised interest rates by a quarter of a percentage point and projected that its policy rate would be in the range of 1.75% and 2% by the year's end in a newly aggressive stance to fight the red-hot inflation.
Hence, new Federal Reserve projections indicate six more rate hikes this year, per CNBC. The Fed downgraded its forecast for 2022 median real GDP growth from 4% in December to 2.8% for 2022. However, it kept the growth rate expectations same at 2.2% for 2023 and 2% for 2024.
Inversion of Yield Curve, But Recession Fears Seem Exaggerated
Uncertainties and global growth worries sparked a safe-haven rally and led the benchmark 10-year U.S. Treasury yield to drop to 2.38% on Apr 1 from 2.48% from Mar 25. The spread between benchmark U.S. treasury yield and the three-year treasury yield were negative 20 bps on Apr 1.
When the curve inverts, “there has been a better than two-thirds chance of a recession at some point in the next year and a greater than 98% chance of a recession at some point in the next two years,” according to Bespoke, as quoted on CNBC.
There is often a long gap between the first inversion of the yield curve and the real occurrence of recession. The CNBC article quoted that Evercore ISI sees a 25% chance of a U.S. recession. According to MUFG Securities, the yield curve inverted 422 days ahead of the 2001 recession, 571 days ahead of the 2007-to-2009 recession and 163 days before the 2020 recession, as quoted on a CNBC article.
Moreover, we don’t expect the inversion of yield curve to prolong. Federal Reserve Governor Lael Brainard said the Federal Open Market Committee (FOMC) was "prepared to take stronger action" should already elevated indicators of inflation rates and expectations warrant such moves.
This suggests faster rate hikes and a very rapid drawdown of the Fed’s balance sheet — which has ballooned nearly $9 trillion — than in previous periods. As a result, 10-year U.S. treasury yield touched 2.54% on Apr 5, up from 2.39% recorded on Apr 1. However, three-year yield is still higher at 2.69% as of Apr 5.
ETFs to Tap
Against this backdrop, below we highlight a few top-ranked sector ETFs (Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy)) that beat the S&P 500 (up 3.6%) past month.
First Trust Materials AlphaDEX ETF (FXZ - Free Report) – Up 12.6% Past Month; P/E: 7.50X; Zacks Rank: #1
The materials space has remained strong as the accelerated coronavirus vaccine rollout and the passage of the $1.2-trillion U.S. infrastructure bill are favoring the sector. However, the latest tailwind is the escalating tension between Russia and Ukraine that is aiding materials’ prices. Both countries are metal-rich. As prices of various materials have been on the rise, the material sector has been witnessing solid growth.
Vanguard Energy ETF (VDE - Free Report) – Up 10.4% Past Month; Zacks Rank: #2
Oil prices have been rising since the beginning of 2022. The upside in crude oil prices was triggered by factors like easing Omicron variant concerns, supply shortages, and geopolitical tensions in Eastern Europe and the Middle East.
iShares U.S. Infrastructure ETF (IFRA - Free Report) – Up 8.15% Past Month; Zacks Rank: #2
The fund taps U.S. companies that have infrastructure exposure and that could benefit from a potential increase in domestic infrastructure activities. The passage of the $1.2-trillion worth of U.S. infrastructure bill is a plus for the space.
Health Care Select Sector SPDR ETF (XLV - Free Report) – Up 7.16% Past Month; 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 Plus, the pandemic also triggered a race to introduce vaccines, tests and treatment options, placing the healthcare sector in a sweet spot.
VanEck Semiconductor ETF SMH – Up 5% Past Month; Zacks Rank: #1
The demand for semiconductors has been very strong in the recent months. There has been a supply crunch of chips. Hence, high demand will the space charged-up in the coming days (read: 4 Sector ETFs to Bet Big On Despite Subdued Manufacturing Data).