2022 is off to a rocky start. Today I’m going to cover which sectors perform well when rates rise… and also those that suffer.
I want you prepared for 2022 if rates rise rapidly. So, let’s get to it.
With stocks racing towards a correction, here’s the bear case in a nutshell. Inflation is at a 40-year high. The Fed’s behind the curve. They’ve waited too long to tame prices. Now the sky’s the limit on rate hikes. Look out below!
Hold on. The most widely appreciated risks rarely move markets because they’re already largely priced in.
Sure, stocks are likely to stay choppy until inflation peaks. But that’s no reason to panic. It’s a rotating rally. Said simply, when one sector stumbles, others perk up.
Rate worries have already battered high-quality growth stocks. And plenty of value stocks are rallying as rates rise. MAPsignals data shows that perfectly.
Let’s start with what’s getting sold hard: Technology, Healthcare and Discretionary. You may be curious why Tech stocks are getting battered. Here’s the deal.
Big growth stocks have been huge winners. Tech has led the charge. Investors pay up for growth stocks because their profits are expected to ramp up fast. But when interest rates rise those future earnings decrease in value. That’s why growth stocks have cooled off.
And Healthcare is getting punished likely due to high debt levels. Many companies carry a lot of debt to finance R&D (research and development). If rates are set to rise, that can impact the earnings picture in a negative way.
Now let’s go over where the buyers are at.
As Jim Cramer likes to say, “there’s always a bull market somewhere!” Energy and financials are outperforming. Why?
Inflation and rising rates make lending money and selling commodities more profitable. That’s why banks and oil stocks are tracking bond yields higher.
Now, let’s look at historical data to see if there’s confirmation in my thesis.
Which Sectors Perform Well When Rates Rise
Energy and financials are cyclical. That means, they’re sensitive to what the economy’s doing. That’s why they move in the same direction as interest rates 60% of the time.
On the flip side, technology stocks tend to zig when interest rates zag. Tech only moves with yields 10% of the time. Check out the chart below:
History says to bet on Financials and Energy in this environment. And looking at one more chart, suggests the same. Below are the MAPsignals sector rankings by score. The highest scoring groups are Energy and Financials:
And now let’s take one last angle on why Energy and Financials are winners right now.
Energy and financial stocks pay juicy dividends. That helps investors beat inflation. They yield 4% and 2.4%, respectively, with many blue-chips yielding far more. Compare that to the S&P 500, which only pays 1.5%.
When the macro picture gets murky, investors like bargains. Energy and financials are the two cheapest sectors in the market, trading at only 12X and 14.5X 2022 consensus earnings forecasts, respectively vs. the S&P 500’s 20X.
Here’s the bottom line: Using history and data can help us answer a big question right now: Which sectors perform well when interest rates rise?
The answer is clearly Energy and Financials.
Look, it’s a tough market out there. The new year means a fresh playbook. Stay diversified and don’t panic out of oversold, high-quality growth stocks.
But until inflation cools, make sure you own great value stocks too. MAPsignals can help you find the outlier areas of the market that the professionals are buying in any sector. The Broad Sector module, now lists the top 20 ranked stocks in 5 broad sector groups.
Near-term, focus on quality and ride out higher rates with energy and financials.
*** And check out our latest video: Best Oversold Growth ETFs to Buy Now. Jason shows how markets are seeing the most selling in ETFs and stocks since the pandemic lows.
Historically, this has been a great time to go hunting for oversold ETFs. Hang in there folks.
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Alec Young is an investment strategist, working on Wall Street since 2005. He currently serves as CIO at Tactical Alpha LLC.
Prior to TA, Alec spent 15 years in senior investment strategist roles at major financial firms. Most recently, he served as FTSE Russell’s Managing Director of Global Markets Research. Prior to that, he was VP & Investment Strategist at Oppenheimer Funds and served as Global Equity Strategist at S&P Global.
See his full bio here.