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Biggest U.S. Rate Hike Since 2000 in May: Sector ETFs to Win
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Wall Street has been on choppy ride since the start of 2022 due to rising rate worries. Fed Chairman Jerome Powell lately said the central bank is committed to raising rates “expeditiously” to tame inflation. Inflation is at a 40-year high.
In line with his comments, the Federal Reserve increased its benchmark interest rate by half a percentage point, matching market expectations. This marked the biggest hike in two decades in the United States. In addition, the central bank drew a program in which it will ultimately lower its bond holdings by $95 billion a month.
Fed Chairman Jerome Powell stressed on the commitment to tame inflation but indicated that raising rates by 75 basis points at a time “is not something the committee is actively considering,” per a CNBC article.
Should You Fear Faster Rate Hike?
First of all, we do not expect a massive upheaval in Wall Street due to a 50-bp rate hike in the United States as the move is already priced in at the current level. The Fed has also offered assurance of not hiking rates by 75-bp at one go. This is a hope that investors can derive from the latest Fed meeting.
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.
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. For instance, the benchmark U.S. treasury yield touched 3.24% on Nov 8, 2018, having started the year at 2.46%. If we track the performance of the S&P 500 growth ETF (SPYG - Free Report) , we will see the fund returning 10.3% during that period while the value ETF (SPYV - Free Report) was down 0.5%.
Against this backdrop, below we highlight a few sector ETFs that tend to win in a rising rate environment.
Talks about the steeper Fed rate hikes have boosted the space lately. 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 lockdown phase. With the economic reopening gaining ground now, we expect stay-at-home stocks to underperform and move-out-of-home stocks to take an upper hand now.
The industrials and materials sectors too are likely to perform better in a rising rate environment. Yes, the manufacturing activities have slowed, but the ISM Manufacturing PMI for the United States is still strong at 55.4 in April 2022. This, in turn, would boost the demand for materials. Investors should note that material prices have been steady in recent months. Supply chains are also improving slowly for some industries and higher costs are being passed onto consumers by some producers.
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Biggest U.S. Rate Hike Since 2000 in May: Sector ETFs to Win
Wall Street has been on choppy ride since the start of 2022 due to rising rate worries. Fed Chairman Jerome Powell lately said the central bank is committed to raising rates “expeditiously” to tame inflation. Inflation is at a 40-year high.
In line with his comments, the Federal Reserve increased its benchmark interest rate by half a percentage point, matching market expectations. This marked the biggest hike in two decades in the United States. In addition, the central bank drew a program in which it will ultimately lower its bond holdings by $95 billion a month.
Fed Chairman Jerome Powell stressed on the commitment to tame inflation but indicated that raising rates by 75 basis points at a time “is not something the committee is actively considering,” per a CNBC article.
Should You Fear Faster Rate Hike?
First of all, we do not expect a massive upheaval in Wall Street due to a 50-bp rate hike in the United States as the move is already priced in at the current level. The Fed has also offered assurance of not hiking rates by 75-bp at one go. This is a hope that investors can derive from the latest Fed meeting.
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.
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. For instance, the benchmark U.S. treasury yield touched 3.24% on Nov 8, 2018, having started the year at 2.46%. If we track the performance of the S&P 500 growth ETF (SPYG - Free Report) , we will see the fund returning 10.3% during that period while the value ETF (SPYV - Free Report) was down 0.5%.
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 steeper Fed rate hikes have boosted the space lately. 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 Fund (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 lockdown phase. With the economic reopening gaining ground now, we expect stay-at-home stocks to underperform and move-out-of-home stocks to take an upper hand now.
Materials – Materials Select Sector SPDR Fund (XLB - Free Report)
The industrials and materials sectors too are likely to perform better in a rising rate environment. Yes, the manufacturing activities have slowed, but the ISM Manufacturing PMI for the United States is still strong at 55.4 in April 2022. This, in turn, would boost the demand for materials. Investors should note that material prices have been steady in recent months. Supply chains are also improving slowly for some industries and higher costs are being passed onto consumers by some producers.