Now that we're off zero-percent rates, the new question for investors is "When is the next rate hike?" The Fed has said economic conditions will warrant gradual lifting in 2016 and is projecting four rate hikes for next year. But those estimates are not in line with what many market participants are thinking.
“We think there's likely to be a delay in 2016 before the Fed acts again, leaving enough time between now and then to look around and see if anything breaks as a consequence of the first interest rate hike in almost 10 years,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott. “We don't look for economic conditions to really justify a more aggressive trajectory,” he added.
The investment strategist is warning the dollar should be closely watched in this rising-rate environment and could be a potential risk for 2016. “Companies here in the United States are reporting soft export orders and having a really difficult time competing because of cheap imports as a consequence of the strength of our dollar,” said Luschini.
He also noted that as interest rates rise, emerging market countries could face a problem settling their debt, a majority of which is denominated in the U.S. dollar.
“The search for yield will remain insatiable,” said Luschini. The growing appetite will allow “investors to step back into some of high dividend paying sectors.”
He also thinks investors “can find some pretty plump dividend yields in areas like defensive sectors.” Areas Luschini suggest includes utilities (XLU), telecommunications (IYZ) and consumer staples (XLP).
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