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Cyclical Sector ETFs to Drive Away Fed Rate Hike Fears
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Wall Street just turned choppy after Fed Chair Jerome Powell remarked that most central bank officials anticipate raising interest rates by the end of 2023. While the Fed decided to maintain the target range at the June policy meeting, Powell's remarks point to the tightening of the policy again.
In its June meeting, individual FOMC members indicated their expectations for future rates. Median expectation for funds rates now stands at 5.6% by the end of 2023. This implies two more quarter-point hikes in the remaining meetings this year, creating a very hawkish pause.
Three officials see rates rising closer to 6%. Forecasts for future years also increased from what we saw in the Fed’s March meeting, with expectations of fed funds rate of 4.6% for 2024 and 3.4% for 2025 (read: 4 ETF Winners After Fed's "Hawkish Pause").
The next Fed meeting at the end of July means a lot to investors. About 80% chance of a rate hike in July is currently priced-in.
Should You Fear Rate Hike?
Ebbing chances of U.S. recession is a plus for investors. Some economists believe the U.S. economy will tip into a recession around the end of 2023, while some investment banks believe that the probability of a recession happening in the United States within the next 12 months is falling. 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 further Fed rate hikes, but this hiccup may be short-term in nature.
Wealth Effect in Play?
The Fed boosted its 2023 economic growth expectations to 1% GDP gain, up from the 0.4% estimate in March. Optimism around unemployment also increased, with a projected year-end rate of 4.1% as opposed to March's 4.5% prediction. Inflation projections rose to 3.9% for core and decreased slightly to 3.2% for the headline.
And in a growing economy, most sectors surge from a wealth effect, with a few of the more cyclical corners making the most of this run-up. These industries often sag in a slumping economy but are the biggest winners when rays of hope are seen.
Against this backdrop, below we highlight a few sector ETFs that tend to win in a rising rate environment.
Talks about July’s Fed rate hike, along with improvement in the economy, might steepen the yield curve. Consequently, banks' net interest margins would improve and banking stocks would gain. 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. With the summer season approaching, we expect stay-at-home stocks to underperform and move-out-of-home stocks to take the upper hand.
The ebbing pandemic is a plus point for the transportation sector. The industry has been enjoying continued strong demand with improvements in the supply chain. Delays still exist, but supply-chain issues are slowly improving. This can be viewed as a ray of hope despite rising rate worries.
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Cyclical Sector ETFs to Drive Away Fed Rate Hike Fears
Wall Street just turned choppy after Fed Chair Jerome Powell remarked that most central bank officials anticipate raising interest rates by the end of 2023. While the Fed decided to maintain the target range at the June policy meeting, Powell's remarks point to the tightening of the policy again.
In its June meeting, individual FOMC members indicated their expectations for future rates. Median expectation for funds rates now stands at 5.6% by the end of 2023. This implies two more quarter-point hikes in the remaining meetings this year, creating a very hawkish pause.
Three officials see rates rising closer to 6%. Forecasts for future years also increased from what we saw in the Fed’s March meeting, with expectations of fed funds rate of 4.6% for 2024 and 3.4% for 2025 (read: 4 ETF Winners After Fed's "Hawkish Pause").
The next Fed meeting at the end of July means a lot to investors. About 80% chance of a rate hike in July is currently priced-in.
Should You Fear Rate Hike?
Ebbing chances of U.S. recession is a plus for investors. Some economists believe the U.S. economy will tip into a recession around the end of 2023, while some investment banks believe that the probability of a recession happening in the United States within the next 12 months is falling. 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 further Fed rate hikes, but this hiccup may be short-term in nature.
Wealth Effect in Play?
The Fed boosted its 2023 economic growth expectations to 1% GDP gain, up from the 0.4% estimate in March. Optimism around unemployment also increased, with a projected year-end rate of 4.1% as opposed to March's 4.5% prediction. Inflation projections rose to 3.9% for core and decreased slightly to 3.2% for the headline.
And in a growing economy, most sectors surge from a wealth effect, with a few of the more cyclical corners making the most of this run-up. These industries often sag in a slumping economy but are the biggest winners when rays of hope are seen.
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 July’s Fed rate hike, along with improvement in the economy, might steepen the yield curve. Consequently, banks' net interest margins would improve and banking stocks would gain. 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 – AdvisorShares Restaurant ETF (EATZ - 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. With the summer season approaching, we expect stay-at-home stocks to underperform and move-out-of-home stocks to take the upper hand.
Transportation – SPDR S&P Transportation ETF (XTN - Free Report)
The ebbing pandemic is a plus point for the transportation sector. The industry has been enjoying continued strong demand with improvements in the supply chain. Delays still exist, but supply-chain issues are slowly improving. This can be viewed as a ray of hope despite rising rate worries.