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Author: Tan KW   |   Latest post: Sun, 23 Jan 2022, 4:38 PM


Hawkish Fed boosts value stocks’ appeal for some investors

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NEW YORK, Dec 4 — Some investors are preparing for a hawkish turn from the Federal Reserve by buying the cyclical, economically-sensitive names they gravitated to earlier this year, as expectations grow that the central bank is zeroing in on fighting inflation.

The gap between growth stocks and their value-focused counterparts, which include companies like banks, financials and energy firms, has fluctuated throughout the year, driven in part by bets on how quickly the Fed will normalize monetary policy.

In recent days, signs that the central bank will move faster than expected in the face of surging consumer prices have slammed the shares of growth and technology companies, which have also been roiled by broader market volatility stemming from concerns over the spreading Omicron variant of the coronavirus.

At the same time, some investors have been ramping up bets on so-called value stocks, expecting them to perform better in an environment of tightening monetary policy. Such stocks surged earlier in 2021 as the US economy reopened but faltered later as investors gravitated toward tech shares.

“The Fed brings the punch bowl and they are the ones that remove the punch bowl,” said Michael Antonelli, strategist at Baird. “Markets are quickly repricing their view of the future.”

Futures on the federal funds rate, which track short-term interest rate expectations, late yesterday reflected a roughly 50 per cent chance that the Fed will raise rates from its current near-zero level by May, CME’s Fed Watch tool showed. That compared with around 31 per cent in early November.

Driving those bets are comments from Fed Chairman Jerome Powell, who earlier this week said the central bank will likely in its next meeting discuss speeding the unwind of its US$120 billion-per-month government bond-buying programme.

Powell also said the word “transitory” was no longer appropriate to describe the current high inflation rate.

Stronger-than-expected elements in yesterday's US employment report reinforced the view of a more hawkish Fed and weighed on growth stocks.

Among the casualties was the Ark Innovation ETF, which outperformed all other US equity funds last year due to its outsized bets on so-called stay-at-home stocks. Shares of the fund tumbled 5.5 per cent yesterday to a 13-month low amid steep declines in many of the stocks it holds.

The Russell 1000 Growth index is down 2.4 per cent in the first three days of December, while its value-focused counterpart has risen by nearly 0.9 per cent. The indexes are up 21.1 per cent and 16.6 per cent, year-to-date, respectively.

“The internals of the market are starting to reflect a faster rate hiking cycle and it’s the longer-duration growth stocks that are really selling off,” said Spenser Lerner, head of Multi Asset Solutions at Harbor Capital Advisors.

Higher yields — which can result from expectations of more aggressive Fed policy — can weigh even more on tech and growth stocks with lofty valuations, as they threaten to erode the value of their longer-term cash flows.

At the same time, value and cyclical shares tend to benefit from a stronger economy — often a prerequisite for the Fed to tighten monetary policy.

Lerner is focusing on high-quality, cyclical US large-cap companies that do not trade at high valuations and will benefit from what he expects will be a continuing strengthening of the dollar as the Fed gets closer to raising rates.

Among the data points the Fed will be watching in the week ahead will be the release of consumer price index and core inflation readings next Friday.

Garrett Melson, portfolio strategist with Natixis Investment Managers Solutions, said Powell’s openness to accelerating the Fed’s tapering programme will likely bring more volatility in the coming months as investors position for the possibility of rising rates. He is betting the faster removal of Fed support will lift shares of energy firms and financials.

Not everyone believes the Fed is getting set for rate increases in 2022. Burns McKinney, a senior portfolio manager at NFJ Investment Group, is betting the Fed will not rush to hike rates after unwinding its bond buying but instead gauge the strength of the economy without any monetary support before tightening policy in 2023.

Such an outcome could see the Fed allowing inflation to continue running hot for months, boosting the case for buying cyclical companies such as Lockheed Martin Corp and Honeywell International Inc, which have a history of growing their dividends and may benefit from the Democratic-led infrastructure deal that passed Congress in early November.

“If the Fed hadn’t retired the word ‘transitory,’ all the rest of us had,” McKinney said.


 - Reuters

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calvintaneng higher interest rates will slam down highflying Tech stocks the most compared to all others

Rise of interest rate is reality check against frothy tech stocks with high P/E

Time to go for down to earth stocks like palm oil with real basic earnings that pay out real cash as dividends with real income
04/12/2021 4:33 PM
ahbah Who slam down the cryto currencies today ?
04/12/2021 4:36 PM
ahbah Can the rise of interest rate strengten the force of gravity ?
04/12/2021 4:41 PM
ahbah Fed Chairman Jerome Powell had to go and acknowledge that inflation isn’t

transitory after all and the taper might have to go faster than expected.

the taper might have to go faster than expected.

the taper might have to go faster than expected.
04/12/2021 6:28 PM
ahbah "I think we may be in for more punishment because the valuations got so

out of control," the "Mad Money" host said.
04/12/2021 9:33 PM
ahbah KUALA LUMPUR, Dec 5 — Bursa Malaysia is likely to trade better with

bargain-hunting activities to take the stage next week, given the cheap

valuations of the local equity market.
04/12/2021 9:35 PM
ahbah IMF chief says Omicron could dent global economic growth.
04/12/2021 9:42 PM
ahbah Do they think the Fed is going to raise rates, get ahead of it too early

and everything is going to roll over?
04/12/2021 9:48 PM
Tobby You think Fed going to raise interest rate! How can they! They are trapped in self inflicted financial disaster!
After printing trillions, and keeping interest rate low, those molla end up in stock markets since the bonds are basically can't keep up with inflation rate!
And if Fed increase interest rate now, dollar simply drop to turd pit never to see the light again! Dow simply crash! And yet bonds still can't keep up with self inflicted inflation rate!
Thank you Biden administration for such dumbass move!
04/12/2021 9:52 PM
ahbah IMF urges the Fed to speed up monetary policy tightening amid mounting

inflation fears
04/12/2021 9:54 PM
ahbah Dow simply crash .. is coming ? Get readi for it ?
04/12/2021 9:56 PM
TrippleZ The consequence of playing with interest rate as easy economy tool.
04/12/2021 10:22 PM
ahbah KUALA LUMPUR (Dec 6): Foreign investors continued to be net sellers during the holiday-shortened trading last week with a net outflow amounting to RM550.90 million, MIDF Research said.

Mat Salleh still running away like tikus !!!
06/12/2021 2:33 PM

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