Fed raises rates by 0.5%, signals similar hikes, calming stock market

Posted: 4 May 2022 7:28 pm
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US stocks rallied after Fed Chair Jerome said a 0.75% rate hike isn’t on the table — yet. Here’s how to invest with recession fears hanging over your head.

The Federal Reserve increased interest rates by half a percentage point Wednesday and signaled similar moves in the next few meetings, easing the uncertainty that has fueled the recent selloff in the stock market.
Stocks rallied after the Federal Reserve Chairman Jerome Powell said a 0.75% rate hike isn’t something that policy-makers are currently looking at. That calmed the nerves of investors concerned that an aggressive round of increases in borrowing costs could push the US economy into recession.
Financial markets never move in a straight line. Even with Wednesday’s rally, it’s never too late to revisit your portfolio and make sure you’re ready in case of a shock similar to the ones caused by a recession. Think of the companies that sell things you can’t do without, regardless which way the economic cycle goes: food and energy.

Pricing in risks

Stocks tend to reflect investors’ forward-looking stances. Markets try to price in the risks well ahead of time. In the lead-up to Wednesday’s decision, investors have already been rebalancing their stock holdings in preparation for the impact from rising interest rates. That’s why the S&P 500 index has fallen about 10% this year.
Policy makers began to embark on a rate hiking cycle in March in a bid to curb inflation that has surged to the highest in four decades. Wednesday’s increase took Fed rates to a range of 0.75% to 1%. The move was meant to slow demand that has helped drive consumer prices higher.
Prices have also risen as a result of supply chain bottlenecks caused by COVID-19 lockdowns that are well beyond the Fed’s control.
The recent slump in stock prices were driven by concerns that the rate hikes could push the economy into recession. Those fears are not unfounded. Recession has unfolded in 10 of the past 13 hiking cycles, Charles Schwab Chief Investment Strategist Liz Ann Sonders and Senior Investment Research Specialist Kevin Gordon said in a note. The challenge is for policy makers to calibrate their actions enough to ensure a soft landing, meaning the economy will continue to grow, even at a slower pace.

Are your stocks vulnerable to shocks?

Whether it’s a recession or a slowdown, companies are likely to be affected, and it’s always good to take a look at your portfolio and see whether you own stocks that are vulnerable to potential shocks.
You may have heard fund managers speak of the need to own companies with pricing power. These are the ones that can raise prices without losing customers.
Think of the products you’ll continue to buy even if prices keep going up, and if you lose your job tomorrow. Examples include food and gas.

Outperforming the broader stock market

Since the start of the second quarter, only consumer staples and energy managed to hold on to gains among the 14 sectors within the S&P 500 index.
It’s easy to understand why. About 94% of the companies that sell consumer staples reported first-quarter earnings that beat Wall Street analysts. That’s the highest of all sectors within the S&P 500, according to S&P Dow Jones Indices website.
If investors bought the stocks within the consumer staples sector of the index on April 29, they are expected to generate a yield of 2.4% in the form of dividends, better than the 1.5% for holders of the shares in the broader basket. That provides investors with a source of cash at the end of the year, even if the stock market extends its decline.

Affordable luxuries like Oreos

Of course, stock picking could generate higher returns for shareholders. Take the case of Mondelez (MDLZ), the food manufacturer behind Oreo cookies, Philadelphia cream cheese and Cadbury chocolate. Who could live without chocolates? In fact, the more depressing things get, the more you’ll try to reach for one. Banks from JPMorgan to Credit Suisse say it’s a stock you need in your portfolio.
“We think demand for affordable luxuries like Oreos, Cadbury, and Milka will prove more durable to higher prices than what management has modeled,” Robert Moskow, an analyst at Credit Suisse said in a note April 26.
Seventeen of 21 analysts tracked by Yahoo Finance have a strong buy or buy recommendation on the stock. Their average target price is $72.57, signaling further upside for the stock that traded at $66.19 on Wednesday.

JPMorgan analysts’ favorites

JPMorgan analysts have an overweight rating on the stock. That means investors should allocate more of those shares in their portfolio than their regular weighting in an index.
The analysts expect the company’s own sales growth to outpace its peers that have bigger market capital. The Chicago-based snack manufacturer said in April it’s buying Mexican confectionery business Ricolino from Grupo Bimbo for about $1.3 billion. The deal is expected to double the size of Mondelez’s business in Mexico, adding to its revenue.
Other food stocks rated by JPMorgan analysts as overweight include Keurig Dr. Pepper (KDP) Coca Cola (KO) and Oatly Group (OTLY).
In the energy sector, Valero Energy (VLO), Halliburton (HAL) and Murphy Oil (MUR) were also rated as overweight by the bank’s analysts meaning there’s upside potential to adding more shares of these companies to your portfolio than what the allocation set under the broader index.
Energy stocks have been the best performers, surging 62% in the past year, buoyed by tightening supply. The sector has an added tailwind: the sanctions from the US and its allies against Russia that threaten to isolate the beleaguered nation’s shipments of oil and gas. For a look at the drivers behind the rally, check out our longer article on the subject.
For more on investing in this market, read “Investing in a rising rate world.”

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