Wall St Week Ahead Hawkish Fed Increases Value Stocks Appeal For Some Investors
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A street sign for Wall Street was seen outside the New York Stock Exchange (NYSE) in Manhattan, New York City, USA on December 28, 2016. REUTERS / Andrew Kelly
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NEW YORK, December 3 (Reuters) – Some investors are preparing for a hawkish turnaround from the Federal Reserve by buying the cyclical, economically sensitive names they were attracted to earlier this year, as expectations grow that the central bank will zero in on fighting inflation.
The gap between growth stocks and their value-focused counterparties, which include companies such as banks, finance and energy companies, has fluctuated throughout the year, driven in part by bets on how quickly the Fed will normalize monetary policy.
In recent days, there are signs that the central bank will move faster than expected in the face of rising consumer prices, slashing shares of growth and technology companies, which have also been weakened by broader market volatility due to concerns about the widespread Omicron variant of coronavirus. read more
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At the same time, some investors have increased their efforts on so-called value shares, and expected them to perform better in an environment with tight monetary policy. Such stocks rose earlier in 2021 as the US economy reopened, but later faltered as investors gravitated toward technology stocks. read more
“The Fed brings the punchball and they are the ones who remove the punchball,” said Michael Antonelli, a strategist at Baird. “Markets are rapidly repeating their views on the future.”
Futures on the federal funds rate, which tracks short-term interest rate expectations, reflected late Friday an approximately 50% chance that the Fed will raise interest rates from its current near-zero level by May, CME’s Fed Watch tool showed. That compared to around 31% in early November.
The driving force behind these efforts is comments from Fed Chairman Jerome Powell, who earlier this week said that the central bank is likely to discuss at its next meeting the accelerated winding up of its $ 120 billion-a-month government bond-buying program. read more
Powell also said that the word “transient” was no longer appropriate to describe the current high inflation rate.
Stronger-than-expected elements in Friday’s US employment report reinforced the view of a more hawkish Fed and burdened growth stocks. read more
Among the victims was the Ark Innovation ETF (ARKK.P), which outperformed all other US mutual funds last year due to its oversized efforts on so-called stay-at-home stocks. The shares in the fund fell 5.5% on Friday to a low of 13 months in the middle of sharp falls in many of the shares it has. read more
The Russell 1000 Growth Index is down 2.4% in the first three days of December, while its value-focused counterparty has risen by almost 0.9%. The indices are up 21.1% and 16.6% respectively so far this year.
“The interior of the market is beginning to reflect a faster rate hike cycle, and longer-term growth stocks are really selling out,” said Spenser Lerner, head of Multi Asset Solutions at Harbor Capital Advisors.
Higher returns – which may be the result of expectations of more aggressive Fed policies – could weigh even more on high-value technology and growth stocks, as they threaten to erode the value of their long-term cash flows.
At the same time, value and cyclical equities tend to benefit from a stronger economy – often a prerequisite for the Fed to tighten monetary policy.
Lerner focuses on high-quality, cyclical US corporations that do not trade at high values and that will benefit from what he expects will be a continued strengthening of the dollar as the Fed approaches raising interest rates.
Among the data points the Fed will look at in the coming week will be the release of the consumer price index and core inflation readings next Friday. read more
Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions, said Powell’s openness to accelerate the Fed’s downsizing program is likely to provide more volatility in the coming months as investors position themselves for the possibility of rising interest rates. He is betting that faster removal of Fed support will lift shares in energy companies and finance.
Not everyone believes that the Fed is ready for interest rate hikes in 2022. Burns McKinney, a senior portfolio manager at NFJ Investment Group, is betting that the Fed will not rush to raise interest rates after winding up bond purchases, but instead measure the strength of the economy without any financial support. before the policy is tightened in 2023.
Such an outcome could lead to the Fed allowing inflation to continue to warm for several months, increasing the possibility of buying cyclical companies such as Lockheed Martin Corp (LMT.N) and Honeywell International Inc (HON.O), which have a history to grow their dividends and can benefit from the Democratic-led infrastructure agreement adopted by Congress in early November.
“If the Fed had not withdrawn the word ‘transient,’ then all of us would have done it,” McKinney said.
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Reporting by David Randall; Additional reporting by Ira Iosebashvili; Editing Ira Iosebashvili and Sonya Hepinstall
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