We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Signs of a recovery in the U.S. economy, though not brisk, are now evident thanks to back-to-back months of strong job gains ending in July. Persistently improving wage gains, better housing, decent-though-not-great inflation and manufacturing data, solid retail sales and last but not the least no alarmingly bad news in the global market translated into a super summer American market rally (read: June Retail Sales Rejoice: ETFs & Stocks to Bet On).
In fact, things are extremely accommodative in foreign shores with Bank of England cutting rates for the first time in seven years, Japan planning to push fiscal measures and nudging up monetary stimulus apart from practicing negative interest rates and the Euro zone practicing QE measures also accompanied by negative rates.
Also, the Fed commented that “near-term risks to the outlook have diminished” and expressed confidence in rising household spending. An influence on the stock market of this uptick in the economy was only natural.
Fed Hike in the Cards?
Definitely such new-found optimism about the U.S. economy sparked off the Fed’s hike talks all over again. Many fear that stocks may also slip due to the fear of gradual creases in cheap dollar inflows. But, in reality, this may not happen.
Though bond yields rose post July job data, the rise was steeper in the short-end of the yield curve. Also, Q2 productivity came soft on August 9 indicating that labor is charging more than productivity. As of August 9, 2016, yield on the 10-year U.S. Treasury notes was 1.55%, down 4 bps from the previous day.
Plus, the U.S. economy grew just 1.2% in Q2 against 2.6% expected by analysts. This is a serious issue which can deter the Fed in tightening policies. But then, “the drop in inventories weighed on GDP growth” while consumer spending – the backbone of the U.S. economy – remained strong. Consumer spending expanded 4.2%, representing the highest clip since the fourth quarter of 2014.
All in all, the economy is on the mend, but still has a long way to go. In such a situation, investors should not fear too much about the Fed hike as consumers will likely be much-prepared to digest the move, if there is any.
Wealth Effect in Play?
The S&P 500-bsed ETF SPY gained about 2.6% in the last one month (as of August 9, 2016). If upbeat data points keep coming, earnings recession ends soon and business spending picks up in tandem with economic growth, a wealth effect can be realized.
A few analysts believe that "there's good evidence that both rates and equities can rise in a positive growing environment.” And in a growing economy, cyclical corners benefit the most. These industries often sag in a slumping economy, but are the biggest winners when the market is again on fire.
Cyclicality of Sectors
Among the cyclical ones, as per Fidelity, sectors like consumer discretionary and financials and economically sensitive sectors like industrials and information technology tend to do better in the early phase of the an economic recovery. If the Fed hikes rates in the coming month, it should not be more than just 25 bps. This bit of policy tightening should be plausible for cyclical stocks to advance.
As a result, a few cyclical sectors and related ETFs are expected to perform well ahead. For these investors, we highlight three ETFs below that have heavy exposure to cyclical industries:
The technology sector staged a solid comeback lately with several companies reporting strong earnings. Merger and acquisition activities are also on a tear in the sector. So, this technology ETF can be an intriguing bet right now. The fund added about 7.8% in the last one month (as of August 9, 2016) (read: 4 ETFs to Tap Alphabet Post Upbeat Q2 Earnings).
A small-cap consumer discretionary ETF can be considered a barometer of rising income levels of consumers of an economy. These pint-sized stocks do not have much exposure in foreign lands. With American consumer spending being high, a bet on this fund is warranted.
This fund caters to various booming areas like robotics, autonomous vehicles, energy storage, 3D printing, and space exploration, as per the Factsheet. ARKQ puts about 35% in autonomous vehicles followed by 29% allocation to 3D printing and 25% to robotics (read: 3D Printing ETF (PRNT): What Investors Need to Know).
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Cyclical ETFs to Play Irrespective of Rate Hike
Signs of a recovery in the U.S. economy, though not brisk, are now evident thanks to back-to-back months of strong job gains ending in July. Persistently improving wage gains, better housing, decent-though-not-great inflation and manufacturing data, solid retail sales and last but not the least no alarmingly bad news in the global market translated into a super summer American market rally (read: June Retail Sales Rejoice: ETFs & Stocks to Bet On).
In fact, things are extremely accommodative in foreign shores with Bank of England cutting rates for the first time in seven years, Japan planning to push fiscal measures and nudging up monetary stimulus apart from practicing negative interest rates and the Euro zone practicing QE measures also accompanied by negative rates.
Also, the Fed commented that “near-term risks to the outlook have diminished” and expressed confidence in rising household spending. An influence on the stock market of this uptick in the economy was only natural.
Fed Hike in the Cards?
Definitely such new-found optimism about the U.S. economy sparked off the Fed’s hike talks all over again. Many fear that stocks may also slip due to the fear of gradual creases in cheap dollar inflows. But, in reality, this may not happen.
Though bond yields rose post July job data, the rise was steeper in the short-end of the yield curve. Also, Q2 productivity came soft on August 9 indicating that labor is charging more than productivity. As of August 9, 2016, yield on the 10-year U.S. Treasury notes was 1.55%, down 4 bps from the previous day.
Plus, the U.S. economy grew just 1.2% in Q2 against 2.6% expected by analysts. This is a serious issue which can deter the Fed in tightening policies. But then, “the drop in inventories weighed on GDP growth” while consumer spending – the backbone of the U.S. economy – remained strong. Consumer spending expanded 4.2%, representing the highest clip since the fourth quarter of 2014.
All in all, the economy is on the mend, but still has a long way to go. In such a situation, investors should not fear too much about the Fed hike as consumers will likely be much-prepared to digest the move, if there is any.
Wealth Effect in Play?
The S&P 500-bsed ETF SPY gained about 2.6% in the last one month (as of August 9, 2016). If upbeat data points keep coming, earnings recession ends soon and business spending picks up in tandem with economic growth, a wealth effect can be realized.
A few analysts believe that "there's good evidence that both rates and equities can rise in a positive growing environment.” And in a growing economy, cyclical corners benefit the most. These industries often sag in a slumping economy, but are the biggest winners when the market is again on fire.
Cyclicality of Sectors
Among the cyclical ones, as per Fidelity, sectors like consumer discretionary and financials and economically sensitive sectors like industrials and information technology tend to do better in the early phase of the an economic recovery. If the Fed hikes rates in the coming month, it should not be more than just 25 bps. This bit of policy tightening should be plausible for cyclical stocks to advance.
As a result, a few cyclical sectors and related ETFs are expected to perform well ahead. For these investors, we highlight three ETFs below that have heavy exposure to cyclical industries:
iShares US Technology (IYW - Free Report)
The technology sector staged a solid comeback lately with several companies reporting strong earnings. Merger and acquisition activities are also on a tear in the sector. So, this technology ETF can be an intriguing bet right now. The fund added about 7.8% in the last one month (as of August 9, 2016) (read: 4 ETFs to Tap Alphabet Post Upbeat Q2 Earnings).
PowerShares S&P SmallCap Consumer Discretionary Portfolio ((PSCD - Free Report) )
A small-cap consumer discretionary ETF can be considered a barometer of rising income levels of consumers of an economy. These pint-sized stocks do not have much exposure in foreign lands. With American consumer spending being high, a bet on this fund is warranted.
ARK Industrial Innovation ETF (ARKQ - Free Report)
This fund caters to various booming areas like robotics, autonomous vehicles, energy storage, 3D printing, and space exploration, as per the Factsheet. ARKQ puts about 35% in autonomous vehicles followed by 29% allocation to 3D printing and 25% to robotics (read: 3D Printing ETF (PRNT): What Investors Need to Know).
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>