If you are trying to time the FOMC’s next rate hike you may want to buy financial stocks sooner rather than later. Citigroup (C) and JPMorgan (JPM) are hovering near 52-week highs and historically banks perform better in a rising interest rate environment.
Charles Lieberman, chief investment officer, Advisors Capital Management is not waiting on the Fed, he’s already adjusted his portfolio to include economically sensitive stocks like the aforementioned financials. “We want the more cyclical plays," he says. "The economy is doing well, corporate profits are doing well. That’s where the earnings leverage is going to be located, so it's sectors like financials, industrials and consumer discretionary, those parts of the markets will do well.”
Corporate earnings in the third quarter are on pace to rise 8% from the year-ago period, according to FactSet. Healthier companies can aid job and wage growth, helping build the case for higher interest rates. In preparation, Lieberman tells us he is getting out of the sectors most at risk. “We want to avoid the safest places, especially utilities (XLU), that’s expensive. As interest rates go up utilities become very unattractive.”
Another area that is looking not so attractive is the bond market. “Investors are getting very little return in the bond market these days," Lieberman told Yahoo Finance, "especially high quality bonds. [On] the 10-year treasury (TNX) you are getting 2.25% and the Fed wants inflation to get to 2%, no return to speak of and a lot of risk.”