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Sector Playbook For Fed Rate Hikes Favors Value

Sector Playbook For Fed Rate Hikes Favors Value

December 21, 2021

For those of us who haven’t already started holiday vacations, we all know this was Federal Reserve (Fed) meeting week. In anticipation of how much investors would be focused on the Fed this winter, we put a chart in Outlook 2022: Passing the Baton showing how well stocks have historically handled the start of rate hiking cycles, shown below.

The chart in the Outlook 2022 publication showed stock performance in the 12 months leading up to initial rate hikes over the past 60 years. The numbers are great—an average gain of 11.5% and positive in all 9 cases. But now that the Fed has made its big pivot, the first rate hike may be closer to 6 months away (our expectation is still September). Either way, smaller gains may be more reasonable to expect over the shorter period until the first hike.

As seen in the LPL Chart of the Day, over the past 6 cycles, the S&P 500 has gained 9.5% on average during the 6 months leading up to the first hike (Source: Strategas). Taking a deeper dive, we can see what sectors performed best during this pre-Fed hike periods—materials, industrials and energy.

“The cyclical value sectors such as energy, materials, and industrials have historically done well leading up to the start of Fed rate hikes,” said LPL Financial Equity Strategist Jeffrey Buchbinder.” Every cycle is different but we wouldn’t be surprised to see value stocks make another run as the economy picks up some speed after the latest waves of COVID-19 variants fade—hopefully soon.”

Relative valuations still suggest value may still have some days in the sun ahead of it. But stronger momentum in growth stocks over the past several months suggest keeping any tilt minimal—or leveling out style exposure. Technical analysis still points toward growth.

Bottom line, we think accelerating economic growth and attractive valuations may outweigh the strong technical momentum and pandemic resilience of growth stocks in the near term. So for now, we’re sticking with our recommended modest value tilt, but we plan to stay nimble.



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All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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