Investors are recalibrating their portfolios to take into account a more hawkish Federal Reserve, a sign that the central bank is ready to step up in its fight against inflation.
Investors are recalibrating their portfolios to account for a more hawkish Federal Reserve as signs the central bank is ready to step up in its fight against inflation rocked markets in the first week of 2022.
Yields on the benchmark 10-year US Treasury Index are on track for their biggest weekly gain since September 2019, as tech and growth stocks tumbled and investors bought bank stocks, energy companies and other economically sensitive companies.
The action is largely reminiscent of how the markets started in 2021, when the rollout of coronavirus vaccines boosted expectations of an economic reopening of the United States. Yields fell later in the year as the rally in economically sensitive stocks slowed and investors returned to big tech and growth stocks that led markets higher over the past year. the last decade.
This time around, investors need to consider a Fed that is expected to hike rates at least three times this year as it battles soaring consumer prices. This could weigh on tech and growth stocks as higher borrowing costs could erode their future earnings. The S&P 500 Value Index has gained around 1% for the year to date, while the S&P 500 Growth Index has fallen by around 4%. The broader index recently fell about 1.7% for the year.
Bob Leininger, portfolio manager at Gabelli Funds, expects this trend to continue and focus his portfolio more on financials, energy and aerospace stocks such as Boeing Co in anticipation of a large resurgence in global travel.
“The Fed is serious about ending quantitative easing,” he said. “This is the year we start to see quantitative tightening and favor value stocks.”
While investors generally view a Hawkish Fed with caution, stocks have nonetheless tended to rise in past rate hike cycles. The S&P 500 has risen at an average annualized rate of 9% in 12 such cycles since the 1950s and has posted positive returns in 11 of those instances, according to data from Truist Advisory Services. Expectations that the Fed will hike interest rates at least three times in 2022 “will reduce speculation” in the market, said Lew Altfest, chief executive of Altfest Personal Wealth Management.
This will likely weigh on the two heavily value-driven sectors like travel and energy that saw outsized gains in 2021, while hurting high-growth tech stocks, he said.
Altfest focuses on companies like banks, which are expected to benefit from higher interest rates and trade at comparatively lower valuations, while maintaining positions in giant tech-driven companies.
The banking sector of the S&P 500 was recently up more than 7% year-to-date and is trading at a sliding price-to-earnings ratio of 11.5, compared to a price-to-earnings ratio of 26.1 for the year-to-date. larger index.
The banks “just seem more rational,” Altfest said.
Investors will take a closer look at bank earnings over the coming week as several major banks, including JPMorgan and Citigroup, are expected to release quarterly results.
Some believe the heavy weighting of tech-focused stocks in the S&P 500 could slow the broader index if these names stumble: Microsoft, Apple, Nvidia, Alphabet, and Tesla accounted for nearly a third of the nearly 29 total return. % of S&P 500 last year. , according to data from UBS Global Wealth Management.
While many of the big tech stocks have been hit in recent days, the pain has been far worse in the little tech names who rallied around at the start of the pandemic. The ARKK Innovation ETF, which was the best performing equity fund of 2020, is already down around 11% year-to-date.
Others, however, are betting that investors will inevitably revert to tech stocks, which have easily outperformed other parts of the market for years.
Ross Frankenfield, Managing Director of Harbor Capital Advisors, has increased his allocation to larger-cap financials, but expects momentum to return to mega-cap tech stocks later in the year as it becomes clear that economic growth will stagnate in 2023.
“There is a good short-term case for value stocks, but in the long term we believe there will be a tailwind again for mega-cap growth stocks once earnings are harder to sell. get it, ”he said.
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