Displaying items by tag: rate hikes

Based on research released Monday, Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, believes that small-cap stocks have already priced in a recession and are currently de-risked. Calvasina noted that small-cap performance has been stable since January and is in a narrow trading range in comparison to large-caps. She stated, “While this doesn’t necessarily tell us that a bottom in the broader U.S. equity market is imminent, it does tell us that the equity market is behaving rationally. It has been our view for quite some time that small-caps, which underperformed large-cap dramatically in 2021, have already been de-risked and are baking in a recession.” She also pointed out the sectors that tend to perform best in the period leading up to the final rate increase in a rate-hike cycle. These include defensive sectors such as consumer staples, energy, financials, healthcare, and utilities. Calvasina wrote the sectors “tended to perform the best within the major index in the six-, three- and one-month periods before the final hikes in the past four Fed tightening cycles.”

Finsum: In a recent research note, Head RBC equity strategist Lori Calvasina believes that stable returns of small-cap stocks are due to recessionary factors already priced in.

While rate hikes appear to be hurting stock and bond prices this year, the rise in yields has made short-term bond ETFs more attractive to yield-seeking investors. As the Fed continues to lift its benchmark federal funds rate to target inflation, bond rates have followed suit. This has been especially true for short-term bonds. In fact, short-term rates are even yielding more than longer-term rates in some cases. For example, the two-year Treasury note had a recent yield of 4%, which was higher than the 10-year Treasury note, with a yield of 3.58%. Plus, investors in short-term bonds are taking on less interest rate risk while getting paid more in interest. If rates continue to rise, bonds with shorter maturities are expected to fall less in price than longer-term bonds. That makes short-term bond ETFs an attractive option for income investors. For instance, the iShares Short Treasury Bond ETF (SHV), which holds Treasuries with maturities of less than a year, has a 30-Day SEC yield of 2.69%, while its price performance on the year is essentially flat.

Finsum:The Fed’s current interest rate policy has resulted in higher yields and less risk for short-term bond ETFs.

Goldman raised the odds of a recession to over one-third in the next two years. The tightening cycle and rate hikes are causing waves in markets and the Fed could bump the Federal Funds Rate eight times this year. Overall economic health in the G10 helps mitigate the possibility of a recession, but it's still a possibility. Experts are saying that the Fed has a narrow path for a soft landing if they want inflation to come down to 2% and keep unemployment from rising. There are signs that the economy is beginning to weaken as consumer confidence is wavering. Still, the stock market doesn’t seem to pricing in a recession, however, the experts on Wallstreet and financial services are beginning to prepare.

Finsum: Look to the yield curve for recession predictions its the best sign and its beginning to warn investors.

Not all REITs are created equally, and many have been pumping out dividends and will come to a screeching halt as the Fed begins to hike interest rates. However, three REITs are in a good position to show dividend resilience to the interest rate risk. The First is Medical Properties Trust which is a healthcare REIT that has three developing investments to create flows for dividends. VICI Properties is up next which is acquiring MGM Growth Properties and has a very low debt to EBITDA ratio which will help in securing dividend payouts. Finally, a long-term strategy is the 1st Street Office which has a consistently high dividend and shares are tied to its NAV.

Finsum: Rate hikes are slow to affect real estate compared to other assets, but aggressive hikes could move quicker.

The muni market has seen sky-rocketing volatility the last ten days with the highest point since the onset of the pandemic. That volatility has hurt many investors as yields rose by over 11 basis points sending bond prices tumbling. Triggering this decline in muni bond prices was Fed Chair Powell’s hawkish turn which included tapering asset purchases and raising rates. This loss is positioning munis for their worst quarter in almost 30 years. Some muni bond issuers are pausing or flat out canceling their development in the wake of a flat out crisis.

Finsum: This could be a quarter for muni bonds which have a close pass through to the Feds target interest rate and are therefore more sensitive.