So what does this mean for investors going forward? As we have seen in recent years, in a world where the Fed keeps rates anchored at zero, stocks benefit, if only because they compare favorably to cash and negligible bond yields. Finally, in such an environment, some old themes, such as a preference for income-producing equities, come back into vogue as investors gird for an even longer spell of “low for long” rates.
Market Realist – Which sectors look attractive now?
With the Fed holding rates, the quest for yield will continue. For example, “bond-proxies” like utilities (XLU) offer some value. With long-term rates stuck, utilities look less vulnerable, especially when you consider that utilities have underperformed other market sectors this year.
The S&P 500 (VOO) fell by 5.9% YTD (year-to-date) while the S&P 500 Utilities Index lost 9.6% of its value this year. The probability of higher interest rates weighed on the utility sector (IDU) all year. This led to the underperformance.
Utilities, among other sectors like staples (XLP), are usually known as “bond proxies.” This is because the utility sector is sensitive to interest rates. Utilities have an unusually large amount of debt in their books due to their high capital requirements. Higher interest rates squeeze the utility companies’ bottom line. Now that interest rates will likely continue to be low, there’s some value in the sector. Dividend stocks (DVY), which are also sensitive to interest rates, look attractive now.
Precious metals, like gold (GLD), benefited from the continued zero interest-rate policy. Gold prices rose by 3.8% since the day before the FOMC’s (Federal Open Market Committee) meeting. Higher interest rates make gold unattractive as an investment because bank deposits would seem more lucrative for investors.
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