Which stock sectors will Fed rate hike help most? History no guide

Fri Dec 11, 2015 12:57pm EST
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By Chuck Mikolajczak

NEW YORK (Reuters) - It has been so long since the Federal Reserve raised interest rates that U.S. stock market investors probably should not look to past rate hike cycles for clues about potential winners and losers.

But investors do expect more rapid-fire moves from one stock market sector to another, based on what happened throughout 2015 when comments from Janet Yellen or other Fed officials changed expectations of central bank moves multiple times.

Valuations were high coming into the year and Wall Street did not expect much U.S. profit acceleration. So the Fed's words had more impact, creating sharp rotations in and out of sectors influenced by interest rates. This phenomenon is expected to continue in 2016.

"There is less momentum now behind these sector moves than there has been in the past three or four years," said Brian Reynolds, chief market strategist at New Albion Partners in New York. "In other words you get fast moves without a lot of conviction."

In 2014, the low interest-rate environment boosted groups that paid high dividends, and sectors such as utilities and real estate enjoyed gains of more than 20 percent. Those sectors had it rougher in 2015, with volatility increasing as a possible Fed rate hike started to dominate market discussion.

Utilities, for instance, suffered five straight days of declines in late August. Then, the sector rallied 1.7 percent on Aug. 26 after New York Fed President William Dudley said the prospect of a September rate hike seemed "less compelling."

As expectation for a rate increase grew again, utilities trailed the broader S&P, until the rate hike did not happen. That prompted another rally in the group that lasted until mid-October.

Since that rally, utility stocks weakened as expectations for a December rate hike grew. While the S&P 500 has rallied nearly 9 percent, utilities are down 1.6 percent, the only one of the S&P industry groups to lose ground.   Continued...

The Federal Reserve headquarters in Washington September 16 2015.  REUTERS/Kevin Lamarque