High-Yield Stocks Win Reprieve, Banks Hammered in Fed Standstill

  • Utilities lead 10 industry groups Thursday with 1.3% gain
  • Financials hit hard as 62 of 88 companies post declines

The Federal Reserve’s announcement of no change in interest rates -- or non-announcement, as it were -- gave a boost to stocks that benefit in a low-rate environment while punishing financial shares.

Leading the post-meeting rally? Utility stocks, a group that until recently seemed to be signaling investors were bracing for a rate hike. The Standard & Poor’s 500 Utilities Index rose 1.3 percent, bringing its five-day gains to 3.9 percent. That was the most of any of the 10 industries and the biggest increase for this group since the five days ended July 8.

Along with utilities, shares of high-dividend-yielding companies posted gains in the absence of a rate increase. The iShares Select Dividend exchange-traded fund reached a four-week high, advancing for the sixth time in eight days, including its biggest surge since 2011 on Sept. 8. Real-estate companies in the S&P 500 jumped 0.9 percent.

Such stocks “should go higher” given the dovish theme in the Fed’s statement and by virtue of rates staying low for longer, said Russ Koesterich, a global chief investment strategist at BlackRock Inc., the world’s largest money manager. What’s more, the announcement doesn’t prompt any change in strategy, he said.

The Fed’s reluctance to end an era of record monetary stimulus, as well as its “dovish statement,” underscored the rally in stocks considered to be interest-rate sensitive, said Sean Lynch, the Omaha, Nebraska-based co-head of global equity strategy at Wells Fargo Investment Institute. “By staying lower for longer on interest rates, some of these yield plays might come back into favor with investors.”

All 10 of the S&P 500 industry groups initially rose after Thursday’s 2 p.m. statement that the Fed would keep its policy interest rate unchanged. That didn’t last as the exuberance from the news faded amid growing concern over global economic growth. Only four groups held onto their gains as the benchmark gauge ended the seesaw day with a 0.3 percent decline.

‘Old Themes’

Health-care stocks rose 0.9 percent, the second-best performance for the day, and were up as much as 2.2 percent. Jim Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management Inc., which oversees $351 billion said, “This non-announcement by the Fed, I think what it did at least initially, was investors went back to the old themes.”

That means some sectors could see further gains ahead. Consumer-discretionary stocks, which have led the bull-market rally with gains of 384 percent since March 2009, have now recouped almost 73 percent of their losses from a two-week slump last month, compared with 52 percent for the broader market.

These stocks “still look pretty good” to Wells Fargo’s Lynch, who said lower energy prices and stronger reports about the housing and labor markets should continue to buoy spending by American consumers.

The Fed’s decision didn’t bode well for financial stocks, as the group fell 1.3 percent, with 62 of 88 companies in the group declining. Charles Schwab Corp. fell 4.3 percent, the most in almost four weeks. JPMorgan Chase & Co. and Bank of America Corp. lost more than 2.3 percent.

“I thought the market was expecting the Fed to hold pat, so the decline in financials across the board was surprising,” Bob Landry, a portfolio manager who helps oversee $23 billion at USAA Investment Management Co. in San Antonio.

Some of Chair Janet Yellen’s comments about global economic growth, as well as concern that the Fed might push off a liftoff to 2016 could be partly to blame, Landry said. Meanwhile, some trading strategies also could have exacerbated the selloff.

“A lot of people have been in banks as a call option on interest rates, and after today those short-term people got out,” said Jesse Lubarsky, a financial-stocks trader at Raymond James & Associates Inc. in New York.

Further declines in this group could provide a buying opportunity for some investors, just as others will take this announcement as a reason to “go back to the old trends again,” Paulsen said.