Where to Invest When The Fed Raises For A Second Time? (SPY) (QQQ) (IWM (XLF)

May 23, 2016 5:31 PM EDT
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Jefferies' equity strategist, Steven DeSanctis, believes that stocks tend to perform well after a second hike with large holding up better over the first three months but small rallying back and posting strong results over the subsequent 6 and 12 months. Other takeaways: value wins, size and quality wins and Energy performs where Discretionary lags.

Key Takeaways:

1) Initially small lags large but bounces back - SMidcaps underperform by 1.2% in the first three months but by 6 months, are outperforming by 3.5% and expand that lead going forward.

2) Growth lags value more often than not after a second rate hike - Of the 5 periods tested, Value outperformed in 4, in only 1 (from 8/99-12/00) growth outperformed.

3) Large companies outperformed in each of the 5 periods tested for a 3 month return, and nearly every period for 6 and 12 months.

4) Similar to size, quality outperforms.

5) Clean balance sheets are rewarded - the lowest debt to capital companies has averaged a gain of 20.5% versus 6.4% for the weakest balance sheets.

6) Sales growth outperforms - Stocks that have the fastest sales growth have topped the slowest over the last two rate hike cycles in the subsequent 6 months and full year.

7) Financials, Tech, and the REITs have posted gains in all three time frames after a second rate hike.

8) Discretionary, Staples, and Industrials lagged in all three periods when the Fed raised rates a second time.

Related ETFs:

  • S&P Dep Receipts (NYSE: SPY)
  • SPDR Dow Jones Industrial Average ETF (NYSE: DIA)
  • PowerShares QQQ Trust (NASDAQ: QQQ)
  • Industrial Sel Sect Spdr Fd (NYSE: XLI)
  • Financial Select Sector SPDR ETF (NYSE: XLF)
  • Vanguard Reit Etf (NYSE: VNQ)
  • Ishares Russell 2000 Etf (NYSE: IWM)
  • Consumers Staples Sel Sect Spdr (NYSE: XLP)

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