Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 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