Hike rates

BofA predicts the Fed will hike rates 11 times. How to invest?

  • Bank of America thinks the Federal Reserve will raise interest rates 11 times in 2022 and 2023.
  • That’s more than most investors expect, but BofA says it won’t derail the market or the economy.
  • The company’s equity strategists have explained which sectors they believe will fare best as rates rise.

Bank of America’s new interest rate forecast is tougher than expected, but the company says the results will be better than investors think.

At the end of January, the bank predicted that the


Federal Reserve

would raise interest rates seven times this year and four more times in 2023 to bring the US benchmark rate to 2.75%.

Bank of America’s forecast is much higher than the three rate hikes anticipated by the Fed in December 2021 and than four hikes Goldman Sachs expects This year. And according to the CME groupBank of America expects two or three more rate hikes than the futures market.

“It looks extreme on the face of it,” Savita Subramanian, head of US equity and quantitative strategy and ESG research, said at a media event on Monday.

Ethan Harris, head of the global economy at Bank of America, explained that the combination of billions of dollars in stimulus funds, low interest rates and a very tight labor market is fueling high inflation. The Fed will therefore have to continue raising its rates to keep this inflation under control.

“The economy isn’t just hitting Fed targets, it’s blowing through stop signs,” he said. “The unemployment rate continues to decline steadily, inflation has run well above target and is expected to remain above target even if supply constraints are removed.”

That seems more than enough to dampen economic growth and, with it, the stock market. But Subramanian says those seven hikes won’t even be enough to bring U.S. rates to a level neutral levelmeaning it won’t slow down the economy.

More importantly, she says, higher rates are ultimately positive for many stocks, and they’re certainly better for the stock market than runaway inflation would be.

“The real thing hurting markets isn’t the number of Fed hikes, it’s the message they send,” Harris said. He explained that the Fed plans to raise rates at a gradual pace of 25 basis points per meeting, which won’t cause much pain. But what investors would have more to worry about is if the Fed said it was going to raise rates dramatically because inflation was spiraling out of control.

Subramanian says the biggest problem for stocks is that the Fed’s balance sheet is shrinking. Tightening conditions only pave the way for modest returns for equity indices, and she expects the S&P 500 to end the year at 4,600 – about 2% above its current level, but lower than when it started the year.

She says investors should stay ahead of the game by investing in revenue streams.

“If I had to think of one metric I would use to pick stocks this year, it would be free cash flow yield,” she said, adding that many financial and health care companies do the trick. “Even big tech companies are starting to look more attractive with a bit of


volatility

and we still see those opportunities in the energy sector,” she said.

In a separate note, Bank of America strategist Jill Carey Hall added that among small and medium-sized businesses, industry groups that have tended to perform better when investors brace for the Fed to turn hawkish include semiconductor chip and chip equipment manufacturers, entertainment, air freight and logisticsand Construction materials.

“Semis has generally held up better,” she said. “A number of industries within the industry (airfreight and logistics, E&C, road and rail, machinery) have also been among the historical outperformers in a hawkish Fed environment. Meanwhile, utilities stocks , commodities and telecommunications were among the typical underperformers.”