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See How ETFs React When Hawks Act Like Doves

As widely expected, the Fed effected the third-rate hike in a decade in its March meeting. The Fed raised the benchmark interest rates by a modest 25 bps to 0.75–1%, confirming the U.S. economy’s growth momentum and the labor market’s well-being, though both still have miles to go. This was the Fed’s second hike in three months (read: Bet on These Quality ETFs as March Hike is Most Likely).

Normally, investors expect such moves to hit rate-sensitive and dividend-paying sectors like utility and real estate but push up bond yields and financial ETFs – a rising rate beneficiary. But in reality, just the opposite has happened. Markets in fact soared following rate hikes, financials dropped, bond yields fell flat and the greenback nosedived.

Why Such Market Behavior?

First of all, this March hike was too obvious to leave an impact on the broader investing world. Possibilities of a rate hike was hovering at around 93%, according to CME futures trading. So, the Fed activity sent no shockwave and the impact was already baked in the asset classes.

Also, in December, the Fed had forecast three rate hikes for 2017. Many started to expect four this year thanks to the recent optimism raised by Trump’s promise of fiscal reflation and deregulation and the resultant rise in inflationary expectations. 

Now, with Fed officials sticking to their outlook for two more rate hikes this year and three more in 2018, market watchers' expectations have been watered down. Since Trump’s policies are hugely expected to boost inflation ahead, many expected more hawkish comments from the Fed and rapid rate hikes to stave off inflation.

The next hike is now expected in June, meaning several days of cheap dollar in hand, causing stocks to soar. This is the time to retreat from the heightened fear of faster policy tightening. Bond yields thus fell, making space for a fixed-income rally at least for the near term.

Market Impact & Surprise ETF Winners

Bonds

The yield on 10-year Treasury notes fell 9 bps to 2.51%, wiping out gains made in recent sessions. Long-term bond ETF iShares 20+ Year Treasury Bond TLT added over 1.2% post Fed comments on March 15, 2017 (read: Doves Turn Hawks: 5 Fed-Proof Bond ETFs to Buy).

Stocks

Wall Street jumped up in joy with the key ETFs like SPDR S&P 500 ETF SPY adding about 0.9%, SPDR Dow Jones Industrial Average ETF DIA expanding about 0.5% and PowerShares QQQ ETF QQQ rising over 0.6% on March 15, 2017.

An unexpected dovish stance of the Fed despite being a hawk hurt the greenback which was at about a 14-year high. PowerShares DB US Dollar Bullish ETF UUP was off about 1.2% on March 15, 2017 (read: Inside Dollar's Valuation: ETFs in Focus).

Gold

Gold prices steadied with the possibility of a gradual rate hike trajectory and political risks in Europe including Dutch elections, Brexit worries and talks of Scotland’s independence vote. These issues helped the safe-haven asset gold. Gold bullion ETF SPDR Gold Shares GLD added about 1.9% on March 15, 2017.

As commodities rise when dollar falls, PowerShares DB Base Metals ETF DBB was also up about 1.6% on March 15 and PowerShares DB Agriculture ETF DBA inched up about 0.4%.

Emerging Markets

Emerging markets – another segment that falls out of favor in a policy tightening era – also benefited. SPDR S&P Emerging Markets Dividend ETF EDIV advanced about 2.9% on March 15, 2017.

Several other emerging market ETFs like iShares MSCI Emerging Markets EEM (up 2.6%), Goldman Sachs ActiveBeta EMkts Equity ETF GEM (up over 2.5%) and Schwab Emerging Markets Equity ETF SCHE (up over 2.5%) hit a 52-week high on March 15 along with EDIV.

Rate Sensitive Sectors

The utility sector – which is high-yielding in nature – normally gives an awful performance in a rising rate environment. But on March 15, 2017, the key utility ETF XLU added over 1.6% on a decline in yields.

The situation was the same for another high-yielding sector – REIT. SPDR Dow Jones REIT ETF RWR nudged up 2.1% on March 15.

Surprise Loser

Financials had a great run lately on rising rate prospects, but the sector lost steam on a calmer Fed. PowerShares KBW Bank ETF KBWB lost about 0.7% on March 15 (read: Play These Stocks & ETFs If Fed Acts in March).

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ISHARS-20+YTB (TLT): ETF Research Reports
 
SPDR-DJ IND AVG (DIA): ETF Research Reports
 
SPDR-GOLD TRUST (GLD): ETF Research Reports
 
SPDR-SP 500 TR (SPY): ETF Research Reports
 
ISHARS-EMG MKT (EEM): ETF Research Reports
 
SPDR-UTIL SELS (XLU): ETF Research Reports
 
NASDAQ-100 SHRS (QQQ): ETF Research Reports
 
PWRSH-DB US$ BU (UUP): ETF Research Reports
 
PWRSH-DB AGRIC (DBA): ETF Research Reports
 
SCHWAB-EMG MKT (SCHE): ETF Research Reports
 
PWRSH-DB B METL (DBB): ETF Research Reports
 
GS-ACTV BETA EM (GEM): ETF Research Reports
 
PWRSH-KBW BP (KBWB): ETF Research Reports
 
SPDR-SP EM DVD (EDIV): ETF Research Reports
 
SPDR-DJ W REIT (RWR): ETF Research Reports
 
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