Business

Fed meeting could trigger stock sector rotation

Investors typically sell shares of utilities and telecoms when interest rates rise

Reuters September 17, 2017

(L to R) Organisation for Economic Co-operation and Development (OECD) Secretary-General Jose Angel Gurria, US Federal Reserve Board Chair Janet Yellen and British Chancellor of the Exchequer George Osborne chat as they pose for a "family photo" for the G20 Finance Ministers and Central Bank Governors Meeting at the Pudong Shangri-la Hotel in Shanghai on February 27, 2016. PHOTO: AFP

NEW YORK: US equity investors could rotate out of high-yielding sectors and into stocks of banks, which would benefit from the next leg up in interest rates, after the Federal Reserve’s policy-setting meeting wraps up on Wednesday.

If the Fed next week gives a nod to rising inflation or focuses its trimmed-down bond buying on longer-dated bonds as it winds down its balance sheet, there could be a shift around of preferred sectors, investors said.

“In the short run financials will benefit,” said Chad Morganlander, portfolio manager at Washington Crossing Advisors, if the Fed action pushes long-term rates higher relative to short-term rates.

Next week’s meeting is not expected to result in an interest rate increase, but investors will focus on how Fed Chair Janet Yellen characterizes recent inflation readings, for clues to the likelihood of a hike in December, as well as on how the US central bank will begin to wind down its $4.5 trillion balance sheet.

Inflation has been persistently low but Yellen could dismiss this as transitory and point to recent stronger-than-expected data on consumer prices.

Any heightened expectations of a rate increase could fuel a rotation and “will certainly change leadership” among market sectors, favouring financials, industrials and materials, according to Jim Paulsen, chief investment strategist at The Leuthold Group in Minneapolis.

“It would put pressure on utilities and telecoms” as well as on companies that consistently increase quarterly paybacks to shareholders, he said.

Investors typically sell shares of utilities and telecoms as well as high dividend payers when interest rates rise, partly because they lose their appeal as bond proxies since investors can expect similar returns investing in bonds, which are seen as safer assets.

So far this year, the S&P 500 banking index .SPXBK is up less than 4%, underperforming the 9.2% gain in the S&P 500 dividend aristocrats index .SPDAUDP. S&P 500 utilities .SPLRCU are up 12%.

Published in The Express Tribune, September 17^th, 2017.

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