Happy Sunday everyone,
Hope you all had a wonderful week even amidst all the fear surrounding the new omicron variant. Markets responded to the likelihood of reentering into lockdowns by ending the week in the red (as seen below).
This week, the Federal Reserve announced that they would accelerate tapering which would in turn bring rate hikes a lot sooner than expected. With inflation at nearly a 40 year high and the labor market improving, the Fed is reducing their bond-buying program from $120 billion 18 months ago to $60 billion and they anticipate to wrap up the program entirely in half the time originally expected.
Two Sectors that could outperform in 2022 include Financials and Healthcare. As rates climbs, profit margins actually increase for banks, brokerages, insurance companies, and other financial companies. When interest rates are higher, banks make more money, by taking advantage of the difference between the interest banks pay to customers and the interest the bank can earn by investing. Additionally, higher interest rates tend to reflect a period of greater economic growth, with the Federal Reserve raising rates to slow expansion. A stronger economy means more consumers seek loans, helping banks as they benefit from the difference between the interest they charge investors for the loan and the amount they earn by investing that money.
According to Wells Fargo, “universal banks look well positioned to capitalize on the potential for improving loan demand as excess liquidity is reduced”. Some ETFs that could provide your portfolio with financials exposure include XLF, VFH, KBE.
Another factor I'm considering in regards to growth stocks, is that higher interest rates means that it will cost more to borrow - and growth companies typically like to borrow money cheaply - so if they aren't borrowing as much with higher rates, perhaps their outlook isn't going to be as bullish as before.
Have a great week and upcoming Christmas holiday (if you celebrate!)
- Rickie & Humphrey
In the Markets
Weekly News Roundup
Fed to Accelerate Tightening, With As Many As Three Rate Hikes In 2022 (NBC News)
Featured in this week’s introduction (above)
Rivian R1T Named MotorTrend’s Truck of the Year (CNBC)
Rivian’s R1T, the first mass-produced electric truck in the U.S. won MotorTrend’s Truck of the Year beating out the likes of Ford, GM and Hyundai.
RH: This is a big deal for electric vehicle makers, especially those not named Tesla, because MotorTrend’s annual award provides third party validation to a name not considered yet a household name.
HY: I’ve been eyeing Rivian stock but honestly can’t find the gall to pull the trigger, even at sub $100. It’s still overly priced in terms of valuation, but the comparable in the space is Tesla, so I’m still going to wait and see how their first earnings call goes.
UK Reports Highest Number of Daily Covid Cases Since the Pandemic Began (CNBC)
The U.K. reported a record 78,610 cases in the last 24 hours on Wednesday. A record short-lived as they reported 93,045 cases just last night (Saturday).
RH: This new variant is moving and its moving fast! New York City is having an outbreak right now.
HY: It’s still unclear whether or not the new variant is more ‘deadly’, or simply more transmissible. If it’s less lethal yet more contagious, that might be a net positive effect. Still, let’s stay safe and not get COVID, and my thoughts go out to all those that have been affected by it.
Did you ever end up buying into Rivian?
hi Rickie and Humphrey, what is the rationale for mentioning Healthcare as a sector that could outperform in 2022? The explanation for the Financials is clear, but I'm trying to understand the Healthcare statement.