In the six-plus weeks since the Fed announced that they would begin tapering bond purchases, stocks have been barraged with a series of positive and negative developments. Emerging markets have stoked fear and demand for safe havens while consumer related industries have suffered.
“We’ve seen banks, healthcare and utilities doing the best here” since the Fed’s announcement on December 18th, says Paul Hickey of Bespoke Investment Group in the attached video.”We want to look at what’s doing well and whether that is a sign of things to look for going forward.”
One thing on everyone’s mind is interest rates, and more specifically, how much they might rise as a result of the Fed reducing its purchases in the bond market.
“You would expect banks to rally because higher interest rates are going to steepen the yield curve and increase net interest margins,” Hickey says.
At the same time he says “utilities are a little surprising [since] you would expect them to do poorly in a rising rate environment.” But as we’ve seen long term rates are actually down so far. In fact, the 10-year yield is at a five month low.
In short, that means somebody is going to be wrong on this early rate trade, as banks and utilities can’t both be right for opposite reasoning on yields.
On the other hand, the healthcare sector is doing well, Hickey says, pointing to a flurry of recent announcements as well as increased enrollment in Obamacare as a boost to the customer base of the drug makers.
As for the rate losers, Hickey highlights a few early laggards in the waning days of the tapering era.
“Anything with the consumer attached to it has been doing poorly,” he says, in particular autos, retailers and household and personal products.
That said, Hickey is quick to point out that these moves are rarely directly correlated to rates alone, saying it is rarely clear cut like that.
“It’s just the world we’re in,” he says.