Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

3 Stocks Sectors That Will Win in The Fed’s Great Balance-Sheet Unwind

Stock-Markets / Stock Market 2017 Jul 24, 2017 - 04:39 PM GMT

By: John_Mauldin

Stock-Markets

BY STEPHEN MCBRIDE : In its June meeting, the Fed pledged to begin the unwind of its $4.47 trillion balance sheet in September.

Each month, about $50 billion in Treasury bonds on the Fed’s ledger reach maturity. Then the Fed buys new bonds to replace them.

The first step in the “great unwind” will be to let a portion of these maturing bonds roll off the balance sheet.


When the Fed goes from being a net buyer to a net seller, the bond price will likely drop, and interest rates will rise. For all intents and purposes, ‘’normalizing’’ the balance sheet equates to a series of rate hikes.

What does this mean for investors?

A huge market crash is not a distant possibility. However, ‘’sell everything and head for the hills’’ is rarely a useful strategy.

So I looked at the sectors that are set to thrive in this environment and picked the three that look most promising.

Here they are.

#1: Healthcare Stocks

Healthcare was the worst-performing S&P 500 sector in 2016 and ended the year in the red. However, since the beginning of 2017, the sector is up 15.3%.

The future looks bright, too.

In their latest Earnings Insight report, FactSet found that of all the sectors, healthcare received the most bullish ratings from analysts for Q3 2017.

Why?

Because of the rate hikes.

Since 1962, healthcare has always been the best performing sector during hiking cycles (see the chart below).

Source: Mauldin Economics

#2: US Small Caps

Small caps are the worst performing group so far in 2017. The sector underperformed large stocks by 47%. However, the Fed is likely to swing the balance in small caps’ favor this fall.

Small caps do exceptionally well when rates rise (see below).

Source: Mauldin Economics

Since 1979, small caps have outperformed their large counterparts by an annualized 2% in periods of rising rates.

Credit Suisse and BNY Mellon have both recommended investors be overweight small caps in this environment.

#3 Europe

Don’t put all your eggs in the US. If you want to take full advantage of the Fed’s unwind, Europe is another promising place to look at.

Europe’s central bank (ECB) has been making hawkish statements as of late. But the fact is they are still buying €60 billion in assets every month. And their interest rates are still at 0%.

This divergence in policy supports higher asset prices in Europe. This is seen in the widening spread between Treasury and German bund yields.

Source: Gavekal

History shows US hiking cycles are usually good for European equities. In fact, global equities (ex. US) outperformed US stocks in 7 out of the last 8 hiking cycles.

In the last 8 hiking cycles, global equities, measured by the MSCI EAFE Index, have grown at an annual rate of 14.5%, according Ritholtz Wealth Management. That’s almost double the 7.85% for the S&P 500.

This divergence has already manifested itself in stock markets.

Since the beginning of 2017, the Vanguard FTSE Europe ETF (VGK)—the main ETF for the European market—is up twice as much as the SPDR S&P 500 ETF (SPY).

And now Europe’s performance has drawn the interest of major money managers—which is a bullish signal in and of itself. In a recent outlook, Credit Suisse said Europe was its “most preferred region,” citing attractive valuations as the reason.

Jared Dillian, Former Head of ETF Trading at Lehman Brothers, is another high-profile investor who has been bullish on Europe since December 2016.

Post-US election, money was pouring into US stocks. However, as a determined contrarian, Jared invested in a large-cap European bank. The trade has earned him a 57.7% gain already.

Join 200,000+ Investors Who Get an Advantage Only a Former Wall Street Trader Can Provide

If you want more contrarian investment ideas from the former head of ETF trading at Lehman Brothers, you can get Jared’s insight an analysis through his free weekly newsletter, the 10th Man.

Click here to sign up.

John Mauldin Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in