The entire world is waiting for the outcome of the Federal Reserve meeting this afternoon in what must be the most widely anticipated — and over-analyzed — event of this year.
Will the Fed raise rates for the first time in nearly a decade … or will they blink … again?
Based on the pricing of Fed Funds futures contracts, investors think there is less than a 25% chance the Fed hikes rates today.
On the other hand, 50% of economists surveyed by Bloomberg said they expect the Fed WILL make a move.
Who’s right? Tune in to CNBC today shortly after 2pm Eastern Time to find out. But either way, the lack of consensus means you can expect plenty of short-term market volatility in response to the Fed’s decision today.
Meanwhile, stocks have traded quietly and in a narrowing range over the past few weeks with investors paralyzed by uncertainty.
This wedge-like pattern of lower highs and higher lows shown in the chart above is a classic sign of indecision on the part of investors and is often a prelude to a major breakout — either up or down.
But be forewarned that the market’s first move could be just a head-fake, which quickly reverses in the opposite direction.
No one knows what the Fed will do later today, so it’s impossible to handicap the likely direction stocks will take afterward. But do investors really have so much to fear from higher interest rates?
Using history as a guide, the short answer is no. In fact, rate hikes have historically boosted stock returns.
If you look at the last six Fed Funds rate tightening cycles, the S&P 500 Index posted above average gains of 9.8% on average nine months after the first Fed rate hike. That’s well ahead of the average 9-month gain of 7.2% for all periods going back to 1983!
Another interesting fact about past rate-tightening cycles is they are often accompanied by subtle shifts in market leadership. New sectors and stocks rotate to the top of the leader board.
As you can see in the graph above, one of the best top performing stock market sectors after the start of a Fed rate tightening cycle is technology.
Six months after the Fed starts raising rates, tech stocks gain about 14% on average, outperforming the S&P 500 nearly 70% of the time.
And nine months after interest rates start rising, technology stocks are up about 20% on average, beating the S&P 500 60% of the time.
But not only are technology stocks typically the best place to invest post-Fed, they are also undervalued at the moment thanks to the recent stock market correction.
Valuations have fallen substantially, making tech one of the two cheapest sectors of the market right now relative to the S&P 500 Index, healthcare is the other. In fact, the current under-valuation of tech stocks relative to the S&P implies solid upside potential from here.
And despite recent market turbulence, several leading technology stocks still merit buy-ratings, including: Apple Inc. (AAPL) and Skyworks Solutions (SWKS).
Outside of tech stocks, other sectors that consistently outperform the S&P 500 after the Fed begins raising rates include energy and industrials.
Whether or not the Fed makes its first interest rate move today, or later this year, rates are bound to rise soon. Once the Fed starts that process, history says stocks can continue to outperform, and for my money these sectors are worth consideration for the best upside profit potential.