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Sector ETFs to Gain as Fed Stays Put, Sees Deeper Rate Cuts in 2024
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The Federal Reserve held its benchmark interest rate steady at a range of 5.25-5.50% on Dec 13, 2023, marking the highest level in over two decades. However, the central bank indicated a rate cut of 0.75% in the coming year.
Fed Chairman Jerome Powell elaborated on the change, stating that we are likely at or near the peak rate for this cycle. Seventeen Fed officials anticipate rate cuts in the coming year, with five of them expecting reductions of more than 0.75%. Only two officials do not foresee any rate cut. No officials predict higher rates in 2024.
Revised Rate Cut Expectations
In contrast to earlier projections of a 0.50% rate cut, the Fed now anticipates a series of three 25-basis-point rate cuts in 2024. The central bank foresees the peak of the fed funds rate at 4.6% in 2024, down from the previous projection of 5.1%, indicating a 0.75% rate cut in the upcoming year.
Inflation, Unemployment and Economic Growth Projections
The Summary of Economic Projections (SEP) revealed the Fed's core inflation outlook, expecting it to peak at 2.4% next year, lower than the previous 2.6% projection. The Federal Reserve expects a further decline in inflation to 2.2% by 2025.
Notably, the core Personal Consumption Expenditures Index, the Fed's preferred inflation measure, showed a reading of 3.5% for October, down from 3.7% in September and 4.3% in June. The Fed’s target for this index is 2%.
Unemployment is projected to reach 4.1% in 2024 and remain at that level through 2026. Economic growth is forecast at 1.4% for next year, down from the previous 1.5% projection, with slight improvements in 2025 and 2026.
Market Reaction
Following the release of the economic projections, market expectations shifted, with a nearly 60% likelihood of rate cuts beginning in March, up from 40% the day before, according to CME Group data. Following the Fed's decision, stocks surged while the 10-year Treasury yield dropped approximately 11 basis points to hover around 4.1%.
Below, we highlight a few sector ETFs that are likely to gain from hopes of deeper rate cuts next year.
The latest change in the Fed’s tone could stimulate stock growth, especially in regional bank stocks, since experts believe the banking crisis was triggered by a sharp increase in interest rates over the past year. Plus, the Fed rate cuts will likely steepen the yield curve, which is another positive for the space.
Real Estate – Vanguard Real Estate ETF (VNQ - Free Report)
The space couldn’t do well in 2023. However, with rates likely to dive next year, real estate stocks, which thrive in a low-rate environment, are likely to excel. The fund VNQ even yields 4.28% annually. This is a plus for investors.
The biotech sector has suffered a bit this year due to less availability of funding due to high rates. But the space has staged a rebound lately and is getting a lift from M&A activities.Novel drug launches, low rates, cheaper valuations and easy access to funds should buoy the zone in 2024.
Utility companies often are debt-dependent due to their significant infrastructure investments. Lower interest rates reduce the cost of servicing this debt, improving profitability. Moreover, utilities are generally seen as stable, income-generating investments, making them attractive in a low-rate environment (read: Forget Retail, Buy These 3 Sector ETFs This Holiday Season).
The areas of blockchain, digital technology and data sharing have surged this year due to the space’s inherent strength and a less-hawkish Fed. With the Fed likely to be more benevolent in 2024 and the strength of data sharing and AI space remaining intact, digital tech ETFs should continue to do well in 2024.
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Sector ETFs to Gain as Fed Stays Put, Sees Deeper Rate Cuts in 2024
The Federal Reserve held its benchmark interest rate steady at a range of 5.25-5.50% on Dec 13, 2023, marking the highest level in over two decades. However, the central bank indicated a rate cut of 0.75% in the coming year.
Fed Chairman Jerome Powell elaborated on the change, stating that we are likely at or near the peak rate for this cycle. Seventeen Fed officials anticipate rate cuts in the coming year, with five of them expecting reductions of more than 0.75%. Only two officials do not foresee any rate cut. No officials predict higher rates in 2024.
Revised Rate Cut Expectations
In contrast to earlier projections of a 0.50% rate cut, the Fed now anticipates a series of three 25-basis-point rate cuts in 2024. The central bank foresees the peak of the fed funds rate at 4.6% in 2024, down from the previous projection of 5.1%, indicating a 0.75% rate cut in the upcoming year.
Inflation, Unemployment and Economic Growth Projections
The Summary of Economic Projections (SEP) revealed the Fed's core inflation outlook, expecting it to peak at 2.4% next year, lower than the previous 2.6% projection. The Federal Reserve expects a further decline in inflation to 2.2% by 2025.
Notably, the core Personal Consumption Expenditures Index, the Fed's preferred inflation measure, showed a reading of 3.5% for October, down from 3.7% in September and 4.3% in June. The Fed’s target for this index is 2%.
Unemployment is projected to reach 4.1% in 2024 and remain at that level through 2026. Economic growth is forecast at 1.4% for next year, down from the previous 1.5% projection, with slight improvements in 2025 and 2026.
Market Reaction
Following the release of the economic projections, market expectations shifted, with a nearly 60% likelihood of rate cuts beginning in March, up from 40% the day before, according to CME Group data. Following the Fed's decision, stocks surged while the 10-year Treasury yield dropped approximately 11 basis points to hover around 4.1%.
Below, we highlight a few sector ETFs that are likely to gain from hopes of deeper rate cuts next year.
Winning Sector ETFs
Regional Banks – SPDR S&P Regional Banking ETF (KRE - Free Report)
The latest change in the Fed’s tone could stimulate stock growth, especially in regional bank stocks, since experts believe the banking crisis was triggered by a sharp increase in interest rates over the past year. Plus, the Fed rate cuts will likely steepen the yield curve, which is another positive for the space.
Real Estate – Vanguard Real Estate ETF (VNQ - Free Report)
The space couldn’t do well in 2023. However, with rates likely to dive next year, real estate stocks, which thrive in a low-rate environment, are likely to excel. The fund VNQ even yields 4.28% annually. This is a plus for investors.
Biotech – Ark Genomic Revolution ETF (ARKG - Free Report)
The biotech sector has suffered a bit this year due to less availability of funding due to high rates. But the space has staged a rebound lately and is getting a lift from M&A activities.Novel drug launches, low rates, cheaper valuations and easy access to funds should buoy the zone in 2024.
Utilities – Utilities ETF Vanguard (VPU - Free Report)
Utility companies often are debt-dependent due to their significant infrastructure investments. Lower interest rates reduce the cost of servicing this debt, improving profitability. Moreover, utilities are generally seen as stable, income-generating investments, making them attractive in a low-rate environment (read: Forget Retail, Buy These 3 Sector ETFs This Holiday Season).
Technology – Transformational Data Sharing Amplify ETF (BLOK - Free Report)
The areas of blockchain, digital technology and data sharing have surged this year due to the space’s inherent strength and a less-hawkish Fed. With the Fed likely to be more benevolent in 2024 and the strength of data sharing and AI space remaining intact, digital tech ETFs should continue to do well in 2024.