U.S. equity investors could rotate out of high-yielding sectors and into stocks of banks, which would benefit from the next leg up in interest rates, after the Federal Reserve’s policy-setting meeting wraps up on Wednesday.
If the Fed next week gives a nod to rising inflation or focuses its trimmed-down bond buying on longer-dated bonds as it winds down its balance sheet, there could be a shift around of preferred sectors, investors said.
Next week’s meeting is not expected to result in an interest rate increase, but investors will focus on how Fed Chair Janet Yellen characterizes recent inflation readings, for clues to the likelihood of a hike in December, as well as on how the U.S. central bank will begin to wind down its $4.5 trillion balance sheet.
Any heightened expectations of a rate increase could fuel a rotation and “will certainly change leadership” among market sectors, favoring financials, industrials and materials, according to Jim Paulsen, chief investment strategist at The Leuthold Group in Minneapolis.
“It would put pressure on utilities and telecoms” as well as on companies that consistently increase quarterly paybacks to shareholders, he said.
Investors typically sell shares of utilities and telecoms as well as high dividend payers when interest rates rise, partly because they lose their appeal as bond proxies since investors can expect similar returns investing in bonds, which are seen as safer assets.
Reference: Reuters
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