One Man’s Opinion: Will The Financial Sector Perform Well Once Rates Rise?

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The US economy has been growing at around 2-2.5 percent for a couple of years now while the business cycle has remained nearly flat, said Rob Morgan, chief investment officer at Sethi Financial Group.

While the economy grinds along, among asset classes, equities are likely to do well though P/E multiples are on the higher side, and some stocks are looking expensive. However, retail investors are yet to get back into the markets, which would bring some cash for the bullrun to continue for some more time, he observed.

Asked if the Fed can justify a rate hike when the US economy just “grinds along,” Rob answered affirmative. There could be more than one hike this year as the Fed really needs some ammo before the next recession, which is likely to be the basis for selling it to the public, he argued.

Growth is likely to be slower for the next quarter or two although it’s likely to be positive, said Brad McMillan, chief investment officer at Commonwealth Financial Network. Slower growth doesn’t necessarily mean moving into a recession, but growth in the same 2-2.5 percent range. The important thing to note is that the expansion could be slower, but it would be sustainable; only such an environment would be able to support equity prices moving slowly upwards, he explained.

Asked to name the sectors that are likely to perform well, Brad said financials surely look attractive. When interest rates go up slowly, lending also starts to pick up. So, financial institutions are not only doing more business, they are also making more on each deal. That’s a good environment for financials going forward, he noted.

Commodities seem to have suddenly fallen out-of-favor though opinions remain divided. Some investors argue commodities are a “generational buy”, while others say downside risks still remain.

Asked to comment on the materials sector, Rob said the US dollar is likely to continue to strengthen, which would be bad news for commodities going forward. Although many investors remain hopeful of a gold rebound in 2016, it’s unlikely the price of yellow metal will find traction next year. Commodities are down quite a bit already and there’s not much potential for more upside, he observed.

Analysts seem to differ over the pace of economic expansion as opinions are divided whether the economy is just “grinding along” or in a “slow growth” mode. The economy is doing more than okay, said William Rodgers, an economics professor at Rutgers University and a former Chief Economist at the Labor Department.

When the economy is averaging more than 200,000 jobs every month in the private sector and the unemployment rate has fallen to 5.3 percent (as per the latest June unemployment data), it shows the economy is nearly firing on all cylinders.

That said, the “real” unemployment rate beyond the official headline numbers is still quite high. The U-6 reading, which captures the number of people in part-time jobs and the long-term unemployed that have stopped looking for jobs, is near 10 percent, indicating full recovery is still some way off, he concluded.

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