How to play a spring stock market bounce now that the Fed has started raising rates

Published Fri, Mar 18 20227:06 AM EDTUpdated Fri, Mar 18 202210:35 AM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

The stock market looks to be setting up for a spring rally, and strategists say investors may want to dip back into some tech and growth names now that the Federal Reserve has laid out its interest rate hiking plans . A post-Fed rate hike rally may seem counterintuitive since stocks, especially tech and growth names, do not do as well in a higher interest rate environment. That may continue to be the case for some shares, but strategists say now that the Fed's forecast for rate increases is out on the table, a major uncertainty has been eliminated. The Nasdaq, in fact, is the major index that's gained the most in the two sessions since the Fed hiked its fed funds target rate by a quarter point. The tech-heavy index climbed 5%, compared with the 3.5% rise in the S & P 500 over those two sessions. According to its projections, the Fed expects to raise interest rates six more times this year and three times next year. Despite the more aggressive than expected forecast, stocks surged Wednesday afternoon after the central bank's rate decision. Stocks were also higher Thursday. But the tone of the market has changed and some strategists who had favored cyclicals and value over growth say investors might want to give tech and some growth names another look. "I just think we swung too far towards fear through the correction to start the year, and I think now the pendulum swings the other way," said Ari Wald, technical analyst at Oppenheimer. "I think after successfully testing the Feb. 24 low, we created a double bottom there. With the combination of the extremes we've seen in some indicators, I do think the setup here is for strength to be stronger. This should be a stronger rally than we've seen." Wald said a beaten-down sector looks appealing again. "In terms of opportunity, we think large-cap growth offers attractive rotation potential following its setback," he said. Wald said his top sectors now are technology, materials and utilities. Those sectors are represented in ETFs, like the Technology Select Sector SPDR Fund ETF; Materials Select Sector SPDR Fund ETF and the Utilities Select Sector SPDR Fund ETF. "We're bullish on technology in the belief the tech-led secular advance is still intact," he said. Wald also said he likes materials and metals for an inflationary hedge. But Wald said the market may not be done testing the lows, and could become more volatile again after a rally. "It's a low. It's too soon to call it the low," he said. For that reason, Wald likes lower-volatility utilities. Lower volatility? "We think volatility is going to die down here because sentiment is so abjectly negative," said Julian Emanuel, head of equity, derivatives and quantitative strategy at Evercore ISI. He said oil prices may have peaked when West Texas Intermediate crude hit $130 per barrel, and that should help stocks. Emanuel said barring a nuclear escalation or expansion of Russia's Ukraine invasion , much of the volatility in the stock market may have already occurred. "The peak in [oil] prices tells you ... that the green light for investors to focus on earnings again is there. And focus on the fact that even though rates are going to rise, valuations in a world where interest rates are 2% are okay," Emanuel said. He notes that earnings estimates have risen since the start of the year, and he expects S & P 500 profits to grow 9.3% this year. "We just think right now that the clouds are parting in terms of monetary policy and absent material escalation. ... Investment sentiment is so negative we just think it's a good time to add to equities," he said. Emanuel, who had been focusing on cyclical and value stocks, said it is now a time to buy some growth names but investors should pick quality and tread carefully. "We turned a week ago from a tactically balanced portfolio to carefully buying on dips but consistent buying on dips," Emanuel said. He created a list of stocks that have both growth and value traits, and some of the names are technology companies. FANG member, Facebook parent Meta Platforms, is on the list, as is Microsoft, KLA and Qualcomm. Other growth names with value traits include Fiserv , eBay, Best Buy and PayPal. Some of the value stocks he likes with growth traits include Walmart , Lennar, Humana, Citizens Financial, CVS Health, Archer-Daniels-Midland and FedEx. Emanuel said there could be further volatility this year, as the markets watch events in Ukraine and also the midterm congressional elections. His year-end target is 4,800 on the S & P 500. But for now, the stock market's trajectory looks to be higher over the next month or two. JPMorgan strategists also believe it's time to add to stock market holdings. "While the commodity supercycle will persist, in our view, the correction in bubble sectors is now likely finished, and geopolitical risk will likely start abating in a few weeks' time (while a comprehensive resolution may take a few months)," wrote JPMorgan's Marko Kolanovic. "Markets may anticipate these turning points sooner, and we think it is time to start adding risk in many areas that overshot on the downside year to date." Strategists say the market has been selling off on dual concerns about Ukraine and the Fed's rate hiking. The Fed may have been a "sell the rumor, buy the fact" type of event for the market. "I think the correction is over and I thought that for a couple of weeks. I think the correction has done what it needs to do," said James Paulsen, chief investment strategist at Leuthold Group. "It took out the concentration of leadership in high growth names. I don't think tech is going to fall apart or die further. I think it's going to go up with the market." He said the markets reached a "dramatic fear cycle and washed out." Paulsen and others say the Fed may have forecast 10 hikes, but it will probably do fewer, and that would be favorable for stocks. Economists have said the central bank could slow its hiking if higher rates start to seriously hurt the economy or if inflation begins to cool. "There are high odds they don't do that many," said Paulsen. "If inflation does start to moderate, you watch some of the rate hikes melt away or slow down." Paulsen said tech, however, may lag some other areas. He expects small caps, international stocks and cyclicals to do well. "If nothing else, there won't be such intense worry about what the Fed's going to do, how they start their tightening program. We're into it. You go back and look historically. Once the Fed starts tightening, the market often goes up after it has a little hiccup. We've had the hiccup," he said As of Thursday's close, the S & P 500 was about 8.5% off its high, and the Nasdaq Composite was 16% below its high. The Nasdaq had been down more than 20%.

A trader on the NYSE, March 11, 2022.

Source: NYSE