By Anora M. Gaudiano, MarketWatch
Investors looking for hints on pace of rate increases
For stock market investors, the coming week is likely to see the
Federal Reserve move back into focus, stealing the spotlight back,
at least briefly, from worries about tariffs and political
turmoil.
The Fed's two-day policy meeting, which will conclude Wednesday
and is widely expected to deliver the first rate increase of 2018,
will be Fed Chairman Jerome Powell's first as chairman of the
central bank, and investors will be eager to find out just how much
he deviates from the legacy of Janet Yellen, whom he succeeded in
early February.
While market participants have fully priced in a
quarter-percentage point rate increase on Wednesday, investors will
parse the wording of the accompanying statement and Powell's
subsequent news conference.
"We want to see if he will do anything out of ordinary. But
generally, neither Powell, nor any other Fed chair would want to
rock the boat," said Diane Jaffee, senior portfolio manager at
TCW.
Read:Fed needs 'an acrobatic sense of balance' to keep markets
calm next week
(http://www.marketwatch.com/story/fed-needs-an-acrobatic-sense-of-balance-to-keep-markets-calm-next-week-2018-03-16)
Fed funds futures market expects three rate increases by the end
of the year, with a more than a 30% chance of four.
The S&P 500 is up 2.9% in the year to date, but remains 4.2%
below its all-time closing high set on Jan. 26. The benchmark
index, which closed with weekly losses on Friday, is still
recovering from its 10% correction in early February. On Friday,
the S&P 500 closed slightly higher at 2,752.01.
Also see:What to expect from the new Fed dot plot on interest
rates
(http://www.marketwatch.com/story/what-to-expect-from-the-new-fed-dot-plot-on-interest-rates-2018-03-16)
But investors continue to be somewhat optimistic and rightly so,
according to Jaffee.
"Consumer sentiment
(http://www.marketwatch.com/story/consumers-may-look-to-spend-now-ahead-of-expected-inflation-upturn-university-of-michigan-report-suggests-2018-03-16),
factory order this week and jobs report last week, all point to a
growing economy. If the economy runs well, it won't matter if there
are three or four rate increases and some sectors are better poised
for such an environment than others," Jaffee said.
Indeed, the market performance in 2018 proved that investors
don't seem to care about higher interest rates as long as they keep
up with inflation.
The yield on the 10-year Treasury note remains below 3%, a level
considered moderate.
The February selloff was sparked by fears of inflation after the
January jobs report showed a pickup in wage pressures. The
subsequent bounceback was fueled by economic data showing prices
still aren't rising too fast.
It is difficult to forecast what the whole market will do over
the next 12 months, but certain sectors are better positioned for a
rising rate environment than others, according to Jaffee.
"As long as the banks can make loans and make a profit on the
spread between deposit and loans rates, banks will be profitable.
Though, if interest rates get too high and crack the demand, then
the cycle will end," Jaffee said.
The S&P 500 financial sector has risen 17% over the past 12
months, slightly outperforming the broader market, which is up
15.6%.
"The technology sector has shown it can have organic growth
regardless of the economic cycle, while industrials and basic
materials will benefit from a 50% jump in the GDP growth if we
indeed achieve a 3% rate," Jaffee said.
According to Atlanta Fed's GDPNow tracker
(https://www.frbatlanta.org/cqer/research/gdpnow.aspx), the U.S.
economy is estimated to have expanded at a 1.8% clip during the
first quarter of this year, which is twice the average rate for
this period throughout the recovery.
But higher rates are still likely to dent some industries that
are seen as bond proxies, such as utilities, telecoms or consumer
staples. These sectors have already been underperforming and may
continue to do so for some time, according to Jaffee.
Since the start of the year, telecoms, utilities and consumer
staples are down between 4.5%-6.5%.
"It is super difficult for utilities and telecoms to grow in the
this environment without underlying growth," Jaffee said.
The Federal Open Market Committee's two-day meeting concludes
Wednesday, with the policy decision due to be announced at 2 p.m.
Eastern. It will be followed by Powell's first news conference as
Fed chief at 2:30 p.m.
Apart form the FOMC, investors will get fresh readings in the
week ahead on February existing and new home sales and durable
goods orders.
See:MarketWatch Economic Calendar
(http://www.marketwatch.com/Economy-Politics/Calendars/Economic)
(END) Dow Jones Newswires
March 17, 2018 12:27 ET (16:27 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.