Strong economic data in the U.S. have made a rate hike in December nearly a sure thing. The stock market is thus transitioning funds to sectors that will benefit from this environment, and away from those that won't.
Below is a chart of Utilities Select Sector SPDR (XLU) - Get Utilities Select Sector SPDR Fund Report . The utility sector has fallen by nearly 15% in 2015 due to various interest rate related factors. First, Utility companies usually employ a lot of debt to finance its operations. Rising interest rates will thus make the cost of financing this debt more expensive, weighing on the sector's bottom line. Furthermore, Utility companies offer higher dividend payouts to compensate for lower revenue growth, and capital appreciation. This gives its stocks a bond like feature. When interest rates rise, it diminishes the return premium of holding the stock, leading investors to sell the sector.
A beneficiary of higher rates, however is SPDR S&P Regional Banking ETF (KRE) - Get SPDR S&P Regional Banking ETF Report . In 2015, KRE is up by about 12%. Regional banks profit from a widening spread between short-term and long-term rates. When the Federal Reserve tightens policy, the yield curve widens, allowing regionals to borrow money in short-dated instruments, and lend it out at an elevated rate over the long-term. This translates into expanding profit margins, and thus drives share prices higher across the sector.
The macroeconomic picture is changing, and investors need to be ahead of the curve. By shifting funds between sectors that look to outperform, and away from those that have benefited in a low rate environment, profiting from equities in the midst of a rate hike is attainable.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.