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There is widespread belief that the Fed will hike interest rates at its upcoming meeting, even as tech stocks underperformed last week.
The US Federal Reserve looks set to provide specifics on interest rates this week, possibly putting an end to all the speculation in recent times. Since speculation on interest rates began, US stocks have not performed as favorably as shareholders expect. Last Friday, stocks closed out their worst week in well over a year. The underperformance seen mostly came from the tech and consumer discretionary space.
Specifically, there are wide expectations that the Fed will increase interest rates as the governing bank meets on Tuesday and Wednesday. However, a substantial number of Wall Street analysts also argue that surging interest rates might stifle tech and growth stocks. Investors are bracing for an aggressive interest rate hike by the Fed, which they believe could occur multiple times this year.
However, it is also worth noting that historically, US stocks perform relatively well during periods of hiked interest rates. This may be because a growing economy is likely to support corporate profit growth and the stock market. According to stats, stocks have surged at a 9% average annual rate during the 12 Fed rate hike cycles for well over 60 years now. Furthermore, according to Truist’s co-chief investment officer Keith Lerner, it has also delivered positive returns 11 times out of those.
An Uneventful Week for Tech Stocks
Late last week, video streaming giant Netflix (NASDAQ: NFLX) posted its Q4 earnings, which fell short of its expectations. The company ascribed the below par performance to decreased viewer subscription as fewer people are signing up. Many traders opine that the Netflix situation may set the tone for other prominent tech names in the coming weeks. Furthermore, the performance of the tech-heavy NASDAQ Composite to close out the week may not augur well for tech stocks. The index dropped by 7.6% for the week, its worst performance since March 2020.
Earnings reports from several tech players are due for release this week. For instance, Microsoft (NASDAQ: MSFT) and Apple (NASDAQ: AAPL) are reporting theirs on Tuesday and Thursday, respectively. Furthermore, EV manufacturer Tesla (NASDAQ: TSLA) reports its own on Wednesday. In addition, other reports expected shortly include 3M (NYSE: MMM) IBM (NYSE: IBM), Intel (NASDAQ: INTC), Caterpillar (NYSE: CAT), and American Express (NYSE: AXP).
Possible Hike in Interest Rates Trigger Investor Sentiment towards Regional Bank Stocks as a Safe Haven
Widespread expectation that interest rates would rise is also consolidating stocks of regional banks. The reason for this trend could be logical and an attempt by investors to reduce their exposure to tech losses. These stocks rank among assets that could still perform well amid a tighter Fed policy and higher yields. For instance, by Friday noon, the SPDR S&P Regional Banking ETF (KRE.P) was up by 2% year-to-date. By comparison, the S&P 500 had slid by 6.6% by the same period.
The current gains on some individual bank stocks are even more impressive, such as the 8.4% year-to-date by Citizens Financial Group Inc (CFG.N). In addition, KeyCorp (KEY.N) shares are up by approximately 9%.
Treasury yields are also significantly higher in anticipation of the Fed’s policy.