Not much was expected from the release of the FOMC minutes this past Wednesday. After all, Janet Yellen has gone out of her way to keep markets calm with her repeated dovish tone since January’s big market sell-off.
The dovish tone that suddenly appeared in January was a stark contrast to the actual December rate hike and the warning for more to come in 2016.
Her about-face in January caused a big sell-off in the U.S. dollar and it created opportunity in asset classes like a falling dollar. Now the dollar is going the other way. Where are the opportunities now?
Before we dive head-first into stocks and sectors that like a rising dollar, let’s first stop and take a look at what has happened since Wednesday’s surprising news.
Immediately following the release of the FOMC minutes, the market sold off, gold sold off, and the dollar headed north. Once the initial shock wore off however, it was surprising to see the market stabilize, gold rally, and the dollar go sideways.
The only real explanation for this is that the market seems to be ready for an interest rate hike this time around. It seems strange that it did not appear to be ready for it in January, but it seems to be ready for it now, just four months later.
What has changed since then that seems to have the market now ready for a June or July rate hike?
There was a lot more uncertainty back in January. Oil was plunging and there seemed to be no bottom in sight. It had gone from just over $107 per barrel clear down to just over $26 per barrel. Some were calling for it to go into the low teens at the time. High yield bonds, many of which were energy related were also plunging.
The sudden dovish stance by the Fed that occurred right about that time turned the dollar to the downside and that helped turn oil around. It is also helped to have oil producers, especially here in the U.S. either freeze or cut their production.
Oil has obviously stabilized considerably since that early February low. In fact, it is now up almost 80% from that low. The oil stocks have also recovered and so has the high-yield debt market.
The energy sector is up about 40% overall since its late January low, and earnings expectations are actually going up once again for the sector. The plunge in oil prices had a major impact on earnings for the energy sector, and it has been a big factor in keeping S&P 500 earnings flat for the last few years.
Now we are once again looking for growth in S&P 500 earnings to resume in the second half of this year. This was more than likely another big factor in the Fed’s sudden reversal.
Emerging markets, especially those in South America were also plunging back in January. It seemed like here again, there was just no bottom in sight. Many of the emerging markets have a lot of exposure to oil and other natural resources. They were getting absolutely clobbered. We were also worried about Brexit back in January. That worry has now subsided.
The emerging markets also finally bottomed in late January and have been recovering ever since. This also has to be a factor in the Fed’s sudden change.
We also had a lot of uncertainty back in January regarding this year’s presidential election. Now that it has been narrowed to just two candidates (barring some sort of surprise), that uncertainty has also died down.
In addition to this, the U.S. economy does not appear to be headed into a recession. The economy has now been expanding, although at a tepid pace, for the last seven years. S&P 500 earnings have also been growing along with the stock market.
Earning leveled off in 2015 and we are expecting just slight growth in earnings this year. As of now earnings are expected to resume their growth track once again in the second half of this year. This is a key factor that I monitor constantly. As long as earnings continue to grow the markets will continue to move higher. When earnings begin to contract however, then we are on the brink of the next bear market.
As you can see a lot has actually happened since the Fed went dovish back in January. A lot of uncertainty has been taken out of the market. The Fed obviously now feels that the market is on firmer ground for a series of long, overdue rate hikes. But we will take it one hike at a time.
When the Fed suddenly turned dovish in January, the dollar began to sell off almost immediately.
This created a great opportunity in precious metals. Gold almost always goes in the opposite direction of the dollar.
Gold, along with silver had one of their best rallies in many, many years.
Back then, I quickly bought some individual precious metal stocks and exchange traded funds. I made a quick 51% in a junior silver miner ETF before selling it recently.
I also bought a decent sized position in the Gold Miners ETF (GDX). I continue to own it for now. More on that in a bit.
In addition to these exchange traded funds I also bought some individual gold stocks. I recently cashed in on Barrick Gold (ABX).
I continue to still own a few like Newmont Mining (NEM), however.
The precious metal stocks no longer have the wind at their back, however. I have not sold all of my holdings in this sector, because so far they have held up surprisingly well. Without a falling dollar however, it could be tough sledding ahead.
The falling dollar was also impacting commodities other than gold. The steel sector rocketed higher, but has now leveled off along with gold. I expected the Fed to maintain their dovish stance for quite some time. I was obviously not alone in this belief. I still own a few steel stocks. It will now be important to watch the dollar going forward for our next clue on commodities.
So now that we have hawkish FED once again, where are the opportunities now?
The first thing to remember is the FED obviously does not see a recession looming on the horizon for the U.S. economy. I do not think they would be getting ready to hike rates again if they did.
This is bullish for stocks. While precious metals and precious metal stocks should be cooling off, good superior growth stocks should be very desirable once again.
I continue to like and own superior growers like Amazon.com (AMZN). They continue to take a big, big bite out of the mall-based retailers. They will soon be rolling out many of their own branded products. I wrote an article about this stock last week.
I still like a superior grower like Facebook (FB). It now has the kind of earnings growth that Apple used to have. I own Facebook, but have no interest in Apple. I wrote up Facebook two weeks ago.
I also like and own other tech stocks like Broadcom (formerly Avago) AVGO.
I also like and own several stalwart growers like Lowes (LOW)…
And Dollar Tree (DLTR)
If the dollar and interest rates continue to rise, keep your eye on the banks and the financials. They will benefit from an environment like this. The ones that are currently on my watch list are stocks like E-Trade (ETFC)
And Broadridge (BR)
Also keep your eye on Insurance Stocks. I recently picked up a few shares of AmTrust Financial Services (AFSI), a nice small-cap insurance stock.
We now have a whole new investing environment. The FED has suddenly moved off of their dovish stance and look to be downright hawkish again. You cannot keep doing the same things you were doing in a dovish environment.
Active managers like myself are looking for new opportunities like the ones that came up earlier this year, when the FED did their last about-face.
So the door is closing on some sectors in the market, but it is now opening in other sectors. But, even more importantly than that, as of now it looks like the seven-year plus bull market can continue for a while, despite tightening monetary policy.