The sectors that benefited most recently from the expectation
that the Federal Open Market Committee would soon begin reducing
the pace of its asset purchases -- these sectors being commodities
and cyclical stocks -- are likely to be hot again when the Fed does
begin the tapering, according to Sam Stovall, chief equity
strategist at S&P Capital IQ.
Stovall noted while the FOMC elected not to begin the tapering
of its bond purchases this month, it didn't repeal the possibility
of tapering altogether. In turn, he said, investors should be
considering if the sector rotation seen since May was historically
consistent, where the yield on the 10-year Treasury note ultimately
will stabilize, and how asset classes traditionally performed
during periods of rising rates.
Stovall said rising rates "certainly have an effect on returns,
especially over short periods of time." He sees the yield on the
10-year note stabilizing between 2.7% and 3.7% and hovering "near
the low end of this range, due to a still weak economy."
With regard to asset classes, "commodities tend to shine during
periods of rising yields, and cyclical stocks hold up surprisingly
well. Bonds, on the other hand (and sometimes REITs), end up on the
wrong end of the see-saw," Stovall said. "So when the Fed retests
investors' taper temperature, even though past performance is no
guarantee of future results, don't be surprised if these same
sectors and asset classes end up running similarly hot and
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