Fed's Nod to Gradual Pace Reshuffles Stock Leaders as Rates Rise

  • Companies expected to be hurt most by tightening outperform
  • Investors were looking for signals of accelerated hawkishness

Yellen's Rate Hike Comments in Two Minutes

The stock market rallied after the Federal Reserve made it more expensive to borrow money for the second time in three months.

Wait, what?

Yep, the S&P 500 Index jumped the most in two weeks even as the central bank moved to keep the economy from overheating. In fact, a basket of stocks JPMorgan Chase & Co. identifies as the ones most harmed by higher borrowing costs -- generally real estate and utility shares coveted for their steady payments -- led the charge with a 1.6 percent rally. Stocks expected to benefit, primarily banks and insurance firms, lagged behind.

To understand why, go back two weeks, when traders priced the odds for a hike at Wednesday’s meeting at 50-50. Those rose to almost 100 percent by March 7, as Fed officials signaled they were ready to move and investors began anticipating the central bank could to tighten four times in 2017, up from a prior forecast of three.

Stocks advanced then, too, but the leaders were reversed, with the rate-positive group rallying 2.3 percent from Feb. 28 to March 13, and the rate-sensitive basket slumping 1.7 percent. 

The Fed did tighten as expected, but instead of moving forward the timeline for subsequent hikes, the central bank signaled it’s going to maintain its gradual approach. Treasuries and the dollar reacted similarly, with the 10-year yield tumbling after a runup into the meeting and the dollar slumping after a two-week gain.

“The outcome was built into the market ahead of time, so you’re seeing some unwinding of that,” Stephen Carl, principal and head equity trader at Williams Capital Group LP, said by phone. “As time goes on, you’ll see more normalization among industries, to where they better align with further tightening.”

Here are more details around the JPMorgan baskets designed to track Fed hawkishness:

  • JPM U.S. Rising Rates Short Basket contains stocks in one of four sectors with the weakest performance during historical periods of increasing rates, or the highest negative multiple sensitivity to increasing rates
    • Industries included: telecom, utilities, real estate, consumer discretionary
    • Companies in the index (as of March 13): TRIP, ED, XEL, SO, DUK, HCN, WEC, SCG, O, PPL, GM, DLPH, AEP, LNT, KORS, ETR, PEG, NEE, CMS, PCG, VTR, PNW, FE, FRT, AEE
  • JPM U.S. Rising Rates Long Basket contains stocks in one of four sectors with the strongest performance during historical periods of increasing rates, or the highest positive multiple sensitivity to increasing rates
    • Industries included: technology, energy, financials, industrials
    • Companies in the index (as of March 13): MS, NDAQ, NTRS, MU, JBHT, DFS, EMR, GS, APH, AMAT, PFG, FLS, ADP, CRM, EA, GLW, ADI, IBM, RHI, KLAC, DOV, SCHW, SWN, COG, HP
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