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.
As widely expected, the Fed effected the third-rate hike in a decade in its March meeting. The Fed raised the benchmark interest rates by a modest 25 bps to 0.75–1%, confirming the U.S. economy’s growth momentum and the labor market’s well-being, though both still have miles to go. This was the Fed’s second hike in three months (read: Bet on These Quality ETFs as March Hike is Most Likely).
Normally, investors expect such moves to hit rate-sensitive and dividend-paying sectors like utility and real estate but push up bond yields and financial ETFs – a rising rate beneficiary. But in reality, just the opposite has happened. Markets in fact soared following rate hikes, financials dropped, bond yields fell flat and the greenback nosedived.
Why Such Market Behavior?
First of all, this March hike was too obvious to leave an impact on the broader investing world. Possibilities of a rate hike was hovering at around 93%, according to CME futures trading. So, the Fed activity sent no shockwave and the impact was already baked in the asset classes.
Also, in December, the Fed had forecast three rate hikes for 2017. Many started to expect four this year thanks to the recent optimism raised by Trump’s promise of fiscal reflation and deregulation and the resultant rise in inflationary expectations.
Now, with Fed officials sticking to their outlook for two more rate hikes this year and three more in 2018, market watchers' expectations have been watered down. Since Trump’s policies are hugely expected to boost inflation ahead, many expected more hawkish comments from the Fed and rapid rate hikes to stave off inflation.
The next hike is now expected in June, meaning several days of cheap dollar in hand, causing stocks to soar. This is the time to retreat from the heightened fear of faster policy tightening. Bond yields thus fell, making space for a fixed-income rally at least for the near term.
Market Impact & Surprise ETF Winners
Bonds
The yield on 10-year Treasury notes fell 9 bps to 2.51%, wiping out gains made in recent sessions. Long-term bond ETF iShares 20+ Year Treasury Bond (TLT - Free Report) added over 1.2% post Fed comments on March 15, 2017 (read: Doves Turn Hawks: 5 Fed-Proof Bond ETFs to Buy).
Stocks
Wall Street jumped up in joy with the key ETFs like SPDR S&P 500 ETF (SPY - Free Report) adding about 0.9%, SPDR Dow Jones Industrial Average ETF (DIA - Free Report) expanding about 0.5% and PowerShares QQQ ETF (QQQ - Free Report) rising over 0.6% on March 15, 2017.
An unexpected dovish stance of the Fed despite being a hawk hurt the greenback which was at about a 14-year high. PowerShares DB US Dollar Bullish ETF (UUP - Free Report) was off about 1.2% on March 15, 2017 (read: Inside Dollar's Valuation: ETFs in Focus).
Gold
Gold prices steadied with the possibility of a gradual rate hike trajectory and political risks in Europe including Dutch elections, Brexit worries and talks of Scotland’s independence vote. These issues helped the safe-haven asset gold. Gold bullion ETF SPDR Gold Shares (GLD - Free Report) added about 1.9% on March 15, 2017.
As commodities rise when dollar falls, PowerShares DB Base Metals ETFDBB was also up about 1.6% on March 15 and PowerShares DB Agriculture ETFDBA inched up about 0.4%.
Emerging Markets
Emerging markets – another segment that falls out of favor in a policy tightening era – also benefited. SPDR S&P Emerging Markets Dividend ETF (EDIV - Free Report) advanced about 2.9% on March 15, 2017.
Several other emerging market ETFs like iShares MSCI Emerging Markets (EEM - Free Report) (up 2.6%), Goldman Sachs ActiveBeta EMkts Equity ETF (GEM - Free Report) (up over 2.5%) and Schwab Emerging Markets Equity ETFSCHE (up over 2.5%) hit a 52-week high on March 15 along with EDIV.
Rate Sensitive Sectors
The utility sector – which is high-yielding in nature – normally gives an awful performance in a rising rate environment. But on March 15, 2017, the key utility ETF (XLU - Free Report) added over 1.6% on a decline in yields.
The situation was the same for another high-yielding sector – REIT. SPDR Dow Jones REIT ETF (RWR - Free Report) nudged up 2.1% on March 15.
Image: Bigstock
See How ETFs React When Hawks Act Like Doves
As widely expected, the Fed effected the third-rate hike in a decade in its March meeting. The Fed raised the benchmark interest rates by a modest 25 bps to 0.75–1%, confirming the U.S. economy’s growth momentum and the labor market’s well-being, though both still have miles to go. This was the Fed’s second hike in three months (read: Bet on These Quality ETFs as March Hike is Most Likely).
Normally, investors expect such moves to hit rate-sensitive and dividend-paying sectors like utility and real estate but push up bond yields and financial ETFs – a rising rate beneficiary. But in reality, just the opposite has happened. Markets in fact soared following rate hikes, financials dropped, bond yields fell flat and the greenback nosedived.
Why Such Market Behavior?
First of all, this March hike was too obvious to leave an impact on the broader investing world. Possibilities of a rate hike was hovering at around 93%, according to CME futures trading. So, the Fed activity sent no shockwave and the impact was already baked in the asset classes.
Also, in December, the Fed had forecast three rate hikes for 2017. Many started to expect four this year thanks to the recent optimism raised by Trump’s promise of fiscal reflation and deregulation and the resultant rise in inflationary expectations.
Now, with Fed officials sticking to their outlook for two more rate hikes this year and three more in 2018, market watchers' expectations have been watered down. Since Trump’s policies are hugely expected to boost inflation ahead, many expected more hawkish comments from the Fed and rapid rate hikes to stave off inflation.
The next hike is now expected in June, meaning several days of cheap dollar in hand, causing stocks to soar. This is the time to retreat from the heightened fear of faster policy tightening. Bond yields thus fell, making space for a fixed-income rally at least for the near term.
Market Impact & Surprise ETF Winners
Bonds
The yield on 10-year Treasury notes fell 9 bps to 2.51%, wiping out gains made in recent sessions. Long-term bond ETF iShares 20+ Year Treasury Bond (TLT - Free Report) added over 1.2% post Fed comments on March 15, 2017 (read: Doves Turn Hawks: 5 Fed-Proof Bond ETFs to Buy).
Stocks
Wall Street jumped up in joy with the key ETFs like SPDR S&P 500 ETF (SPY - Free Report) adding about 0.9%, SPDR Dow Jones Industrial Average ETF (DIA - Free Report) expanding about 0.5% and PowerShares QQQ ETF (QQQ - Free Report) rising over 0.6% on March 15, 2017.
An unexpected dovish stance of the Fed despite being a hawk hurt the greenback which was at about a 14-year high. PowerShares DB US Dollar Bullish ETF (UUP - Free Report) was off about 1.2% on March 15, 2017 (read: Inside Dollar's Valuation: ETFs in Focus).
Gold
Gold prices steadied with the possibility of a gradual rate hike trajectory and political risks in Europe including Dutch elections, Brexit worries and talks of Scotland’s independence vote. These issues helped the safe-haven asset gold. Gold bullion ETF SPDR Gold Shares (GLD - Free Report) added about 1.9% on March 15, 2017.
As commodities rise when dollar falls, PowerShares DB Base Metals ETF DBB was also up about 1.6% on March 15 and PowerShares DB Agriculture ETF DBA inched up about 0.4%.
Emerging Markets
Emerging markets – another segment that falls out of favor in a policy tightening era – also benefited. SPDR S&P Emerging Markets Dividend ETF (EDIV - Free Report) advanced about 2.9% on March 15, 2017.
Several other emerging market ETFs like iShares MSCI Emerging Markets (EEM - Free Report) (up 2.6%), Goldman Sachs ActiveBeta EMkts Equity ETF (GEM - Free Report) (up over 2.5%) and Schwab Emerging Markets Equity ETF SCHE (up over 2.5%) hit a 52-week high on March 15 along with EDIV.
Rate Sensitive Sectors
The utility sector – which is high-yielding in nature – normally gives an awful performance in a rising rate environment. But on March 15, 2017, the key utility ETF (XLU - Free Report) added over 1.6% on a decline in yields.
The situation was the same for another high-yielding sector – REIT. SPDR Dow Jones REIT ETF (RWR - Free Report) nudged up 2.1% on March 15.
Surprise Loser
Financials had a great run lately on rising rate prospects, but the sector lost steam on a calmer Fed. PowerShares KBW Bank ETF (KBWB - Free Report) lost about 0.7% on March 15 (read: Play These Stocks & ETFs If Fed Acts in March).
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 >>