Faster rate hike fears may have ebbed a bit lately thanks to tepid wage growth, muted inflation and soft retail sales data but some strategists still expect 10-year U.S. Treasury yields to move sideways in a range between 2.7 to 3% for the rest of the first quarter and most of the second quarter.
After all, the U.S. economy is on a steadily improving mode and the tax reform is an added advantage. So, some inflationary pressure is likely in the days to come. In early March, Goldman Sachs analysts forecast eight rate hikes in 2018 and 2019, economic growth to slow down to 2.2% in 2019 from 2.3% recorded in 2017 and bond yields to shoot up to as high as 4% (a mark not touched since May 2008).
This may cause rising rate concerns. But if we delve a little deeper, we’ll see there is no need to fear. The last full cycle of rate increases happened in the United States between June 2004 and June 2006 as rates progressively rose from 1.00% to 5.25%. The Federal Reserve started slashing rates from September 2007 through December 2008 until the rates reached the 0.00 - 0.25% range.
In December 2015, the Fed again embarked on a tightening spree and since then has enacted five hikes and brought key rates within the 1.25 - 1.50% range. Even if we assume four rate hikes this year, each worth 25 bps, key rates will not cross the 2.25 – 2.50% range. This is nothing considering the highs seen in 2005-2006.
Now, in a steadily-growing economy, most sectors surge from a wealth effect (Big gains in people's portfolios can make them feel more secure about their wealth and their spending, as per Investopedia).
But a few of the more cyclical corners make the most of this rally. These industries often sag in a slumping economy but are the biggest winners during a revival. Historically, cyclical sectors outperform the defensive ones when rates normalize.
Why Low P/E ETFs Needed?
After a stupendous market rally last year, U.S. stocks are deemed to be pricey at the current level. This is especially for some sectors like technology which is at cloud nine. So, investors fearing a correction in the near term, might want to opt for low P/E funds (read: What Makes Value ETFs a Winner in the 9-Year Bull Market?).
Below we highlight two ETFs from each cyclical sector that have a Zacks Rank #1 (Strong Buy) or #2 (Buy) and a relatively low P/E (36 months) ratio in their respective sectors (read: 3 ETF Areas Up At Least 15% This Year).
The technology sector is on a tear lately. Emerging new technologies like cloud computing, big data and Internet of Things are expected to pull the sector forward in the coming days.
SPDR S&P Technology Hardware ETF (XTH - Free Report) – 15.91x
PowerShares Dynamic Semiconductor (PSI - Free Report) – 16.58x
The sector is likely to benefit from the rising income levels of consumers.
First Trust Consumer Discretionary AlphaDEX Fund (FXD - Free Report) – 14.06x
SPDR S&P Retail ETF (XRT - Free Report) – 15.12x
Rising rate environment will lead to a favorable operating environment for financial stocks.
Financial Select Sector SPDR Fund (XLF - Free Report) – 14.23x
SPDR S&P Bank ETF (KBE - Free Report) – 14.34x
Per Fidelity, sectors like industrials do better in the mid-cycle phase of the economy. In any case, an industrial boom is apparent in the U.S. economy, thanks to Trump’s infrastructure plan and tax cuts.
Industrial Select Sector SPDR Fund (XLI - Free Report) – 18.23x
U.S. Global Jets ETF (JETS - Free Report) – 12.54x
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