All signs pointing to a March rate hike
Drama swirls amid a ‘ shift in tone’ from the Federal Reserve
The Federal Reserve seems to have suddenly changed its mantra from “slow and steady” to “hurry up and go!” And that shift could be evident in the interest rate forecasts it releases after a two- day meeting that endsWednesday. It’s all but certain the Fed will raise its benchmark shortterm interest rate by a quarter percentage point to a range of 0.75% to 1% after central bank policymakers strongly signaled the move in recent weeks. Last week’s strong jobs report pretty much closed the deal. The Fed lifted the rate in December for just the second time in the past decade. More drama is swirling around whether Fed officials will predict faster rate hikes this year and in 2018. Several
times this year, instead of the three the Fed anticipated back in December, notes Bill Stone, chief investment strategist at PNC.
Certain investments have fared better than others under these conditions.
Stocks in the sweet spot: The stocks that perform best when borrowing costs rise are companies that do better when consumers are in a spending mood, businesses are in expansion mode and overall confidence is high, which typically is the case in rate- hike periods.
In Fed rate- hike cycles dating to 1962, the types of large- company stocks that shine include technology names, energy producers, as well as industrial and transportation firms. These stocks are dubbed cyclical, because they do well when the economy is on an upswing.
The fact that the Fed has enough faith in the economy to boost rates is a good thing, says James Paulsen, chief investment strategist at Wells Capital Management.
“Finally, confidence in the future starts to dominate over fear,” Paulsen explains, adding that the market is undergoing a character change that benefits stocks that can boost profits even as rates go up.
The stocks that make the least sense to own are companies deemed defensive, or those that pay out a lot of cash to investors in the form of dividends, and which investors flock to in tough times. Examples include utilities, stocks in telecom, as well as companies that sell everyday products, such as toilet tissue, cereal and liquor.
“When rates rise, these so- called ‘ bond proxies’ lose their attractiveness,” says Sam Stovall, chief investment strategist at CFRA.
With the economy strong, investors should not fear a Fed rate hike Wednesday, Paulsen says.
Best bonds to buy: In a rising rate environment, the price of a bond falls. Boris Rjavinski, an interest rate strategist at Wells Fargo Securities, offers a number of strategies that bond investors can use to survive falling prices.
He stresses that any bond purchased outright can be held to maturity, at which time the investor will get back his full initial investment, as well as collect interest payments along the way.