Value Stocks Get a Second Wind, Thanks to Hawkish Fed and Wall Street Week Ahead

The first week of 2022 has seen markets shaken up because of signs that the Federal Reserve may be ready to put out all the stops in their fight against the surging inflation. This has prompted investors to recalibrate their portfolios to take a more hawkish Fed into account. The 10-year benchmark Treasury yields are on track for their biggest gain in a week since September 2019, whereas growth and technology stocks have tumbled. This is because investors are snapping up shares of energy firms, banks, and other companies that are economically sensitive.

The action is quite reminiscent of how markets had kicked off 2021 when expectations of an opening of the US economy saw a boost because of the rollout of the coronavirus vaccines. Later in the year, the yields had slipped and the rally in shares of economically sensitive companies had also slowed. Meanwhile, investors had turned once more to the growth and big technology stocks that have been leading markets higher in the previous decade. However, things are a bit different this time because investors have to consider a Fed that might give interest rates a boost at least three times in the year, in order to combat the increase in consumer prices.

Growth and tech stocks could take a hit because their future earnings would erode due to higher borrowing costs. There has been a 1% gain in the S&P 500 Value index for the year, but a 4% decline has been seen in the S&P 500 Growth Index. There was a 1.7% decline in the broader index for the year. Most investors and experts expect this trend to continue, due to which portfolios are likely to be more focused on energy, financials, and aviation stocks like Boeing Co. because of expectations of a rise in global travel.

They believe that the Federal Reserve is quite serious about quantitative easing and policy tightening would work in favor of value stocks. Even though investors are cautious about a hawkish Fed, equities have previously benefitted during cycles of rate hikes. In fact, 12 such cycles have seen a 9% increase in the S&P 500 since the 1950s, and 11 of these situations saw a positive return. Market experts said that some of the speculations would die down because of expectations of a hike in an interest rate at least three times in 2022. This would likely have an impact on deep value sectors, such as energy and travel, which experienced significant gains in 2021.

However, technology shares were likely to take a hit because of the hike. Banks are likely to benefit from a rise in interest rates. There was an increase of more than 7% in the S&P 500 bank sector, which makes them appear more rational. The week ahead would also shed some light on the earnings of banks, as a number of large banks, including Citigroup and JPMorgan, are expected to disclose their quarterly results. Some experts believe the S&P 500 could suffer because of a focus on tech stocks.

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