Displaying items by tag: rates

(New York)

If one thing is apparent about the Fed, it is that Jerome Powell and his team are much more hawkish than Yellen or Bernanke. Therefore, it looks like rates are going to continue to rise (even in the face of a market protest, such as is occurring). With that in mind, investors need to find ways to hedge their portfolios or profit from rising rates. One area to look is at bank ETFs. Banks tend to do well as interest rates rise as the lift in rates boosts their net interest margins, a key source of revenue for the sector. Accordingly, take a look at the Financial Select Sector SPDR Fund (XLF) and the SPDR S&P Regional Banking ETF (KRE), both of which had been attracting capital. Additionally, see the First Trust Nasdaq Bank ETF (FTXO), Invesco KBW Bank ETF (KBWB), and the SPDR S&P Bank ETF (KBE).

FINSUM: Banks stocks seem to be a good buy so long as we don’t get an inverted yield curve.

(Washington)

Markets are currently experiencing a great deal of volatility. The Nasdaq is in a correction and the Dow and S&P 500 have shed all their gains for the year. One of the big reasons why is investors’ fear of rising rates. With that in mind, many are hoping the central bank will save markets via the so-called “Fed put”, or the idea that if things get bad enough, the Fed will come in as a backstop with some sort of measure to boost asset prices. However, the truth is that Wall Street says we are not nearly deep enough into a correction/bear market for the Fed to take any sort of accommodative action.

FINSUM: Powell is much more hawkish than Yellen or Bernanke and we have no illusions that there is going to be any sort of supportive measure in the near term. We expect hikes to continue.

(New York)

One of the biggest mistakes that investors might make in this rising rate era is to try to combat rising rates with better yielding bonds. While that strategy can work, especially in short-term bonds with high yields (such as junk bonds), a better strategy is to buy dividend growth stocks. Historically speaking, dividend growth shares have performed well in periods of rising rates, outperforming yield stocks and the broader market. BMO Capital Markets recently put out a piece on the topic, saying that “We prefer to focus on stocks that combine dividend growth and yield characteristics”. Some stocks that meet dividend growth criteria are BlackRock, Bank of America, Union Pacific, and Delta Airlines.

FINSUM: Dividend growth stocks tend to have good capital appreciation during periods of rising rates, which makes them seem like a good bet for this tightening cycle.

(New York)

One of the big developments of this month is not just that stocks have been getting hammered, but that bonds are too. While yields have stagnated from their jump a couple weeks ago, bond funds are seeing major outflows. In fact, investors are withdrawing so much capital from bond funds that it is likely to be the worst month for outflows in the last three years. Through October 19th, investors had pulled almost $25 bn from mutual funds and ETFs that invest in bonds. The losses break 21 straight months of inflows.

FINSUM: A couple things to note here. Firstly, considering Treasuries started the year yielding 2.4% and are now at 3.13%, one month of outflows does not seem too bad. On the negative side, however, it is worrying that bonds are seeing major outflows at the same time as stocks are losing in a big way.

(Washington)

President Trump has been complaining about the Fed’s hawkish behavior for several months. However, yesterday he seemed to escalate his discontent into something more specific. He told the media that he “maybe” regretted appointing Powell to lead the Fed. He said he was intentionally signaling the Fed that he wanted lower interest rates, but he acknowledged that the Fed was an independent entity. When pushed about the circumstances under which he would fire Powell, the President declined to comment.

FINSUM: Investors should keep an eye on whether Trump escalates his rhetoric into action. We doubt he will do anything about the Fed in the near term, but the market would certainly have a big reaction.