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A blowout to investment strategies!

The strong US jobs report has changed the investment settings for those investors who assumed the Fed would only raise interest rates later this year or early next year. In fact, the strong January employment market might change the course of the Fed as soon as in the next few months, provided the layoffs in the petrochemical sector don’t totally devastate the employment market and overall consumer confidence. Overall, job market growth has been excellent now for some time, and for the time being, these figures come along with wage gains too. 

Importantly, investors (i.e. the market) were not expecting these figures and more importantly, this new paradigm is not yet priced-in. The take-away is strongly positive because not only do the dashboard figures show monthly gains, but the revisions brought forward on the previous announcements have been revised upwards. 

What does this mean to the market?
Historically, the beginning of a Fed tightening cycle is positive for stocks, this is because the economy has strengthened. Yet, one shouldn’t see any direct flow-through into the equity market, (which might see some profit taking to start with) until weeks before the end of the 2nd quarter of this year. Until then volatility should increase. 

Additionally, once rates start to rise, energy and material stocks are expected to outperform the market. With rising interest rates, banks finally get some benefits too, they start earning some money on their huge balance sheets. Yet the trade-off of higher interest rates is also a risk to them as they are required to turn-around their credit portfolios to higher rates, which can push part of the weaker credit customer base into default. On the other side, given the rising cost of capital for real estate investments, equity-related investment in commercial property, REIT’s, and private properties should be negative.