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 But investors do expect more rapid-fire moves from one stock market
sector to another, based on what happened throughout 2015 when
comments from Janet Yellen or other Fed officials changed
expectations of central bank moves multiple times.
Valuations were high coming into the year and Wall Street did not
expect much U.S. profit acceleration. So the Fed's words had more
impact, creating sharp rotations in and out of sectors influenced by
interest rates. This phenomenon is expected to continue in 2016.
"There is less momentum now behind these sector moves than there has
been in the past three or four years," said Brian Reynolds, chief
market strategist at New Albion Partners in New York. "In other
words you get fast moves without a lot of conviction."
In 2014, the low interest-rate environment boosted groups that paid
high dividends, and sectors such as utilities and real estate
enjoyed gains of more than 20 percent. Those sectors had it rougher
in 2015, with volatility increasing as a possible Fed rate hike
started to dominate market discussion.
Utilities, for instance, suffered five straight days of declines in
late August. Then, the sector rallied 1.7 percent on Aug. 26 after
New York Fed President William Dudley said the prospect of a
September rate hike seemed "less compelling."
As expectation for a rate increase grew again, utilities trailed the
broader S&P, until the rate hike did not happen. That prompted
another rally in the group that lasted until mid-October.
Since that rally, utility stocks weakened as expectations for a
December rate hike grew. While the S&P 500 has rallied nearly 9
percent, utilities are down 1.6 percent, the only one of the S&P
industry groups to lose ground.
In the past, utilities and real estate were among the better
performers in the three months prior to a rate hike and in the year
following, according to Michael O'Rourke, chief market strategist at
JonesTrading in Greenwich, Connecticut.
Financials and autos lost ground after a positive reaction ahead of
past rate hikes, he said.
Paul Hickey, co-founder at Bespoke Investment Group, a research firm
in Harrison, New York, was wary of sector rotations and advised a
cautious approach on a stock-by-stock basis. He said he did see some
interest in companies related to the consumer and residential U.S.
housing market.
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With employment doing well and wages starting to increase modestly,
"the consumer is in relatively good standing so we want to focus on
areas leveraged to the consumer," said Hickey.
In addition, "Housing is another area where rates are starting to
rise but they are at low rates and demographics support housing."
Another surprise could be financial stocks, traditionally strong
performers in a rising rate environment as banks can lend at more
attractive long-term rates while borrowing at relatively lower
short-term rates.
This time around, though, banks must contend with a flatter yield
curve, a narrowing spread between long- and short-term rates.
"We think there will selling of banks over the course of 2016," said
Peter Cecchini, chief market strategist at Cantor Fitzgerald, who
expects the yield curve to flatten.
"With corporate credit secondary market liquidity non-existent and
with wage growth absent, bank lending standards are likely to
tighten, not loosen," which will also be a headwind, he said.
Pankaj Patel, head of quantitative research at Evercore ISI, said
another possibility is that value-oriented sectors such as utilities
and financials could benefit once the Fed raises rates and ends the
uncertainty that drove much of the market action in 2015.
"We're all expecting the rate increase, and once the rate is
increased, the uncertainty - most of it - will lessen," he said.
(Reporting by Chuck Mikolajczak; Editing by David Gregorio)
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