Will Fed Play Santa Claus For Wall Street? ETFs In Focus

As the Fed meets for the final time in 2018 today, Wall Street is on tenterhooks. President Trump continued his reproach of the Federal Reserve and took to social media to criticize the Fed for preparing for the fourth-rate hike of the year.

Yes, there is a 68% chance of a 25-bp rate hike in the central bank’s Dec 18-19 meeting, per CME FedWatch tool. But what investors should particularly note that the probability has come down meaningfully from Dec 14 when chances of a policy tightening was near 75.8%. In fact, chances were higher a week ago too at 74.1% (read: Odds for December Fed Rate Hike Pretty High: ETFs to Invest).

What Led to Decline in Probability?

According to the President, “a very strong dollar and virtually no inflation” and a wavering international economic backdrop do not call for the fourth rate hike in the United States. The facts appear true given the Invesco DB US Dollar Bullish ETF UUP is up 8.5% and about 0.2% sequential uptick in PCE inflation in October 2018, merely matching market expectations.

Secondly, apprehension of faster-than-expected Fed rate hikes increased the short-term U.S. Treasury yields meaningfully this year while concerns about slowing growth put a cap on long-term yields, resulting in a flattening yield curve and invoking recessionary fears in the United States.

Several foreign economies have been slowing down. The Chinese economy took a hit owing to trade tensions, having seen the lowest growth rate of 6.5% in Q3 of 2018 since the first quarter of 2009. The Eurozone economy registered the weakest growth rate at 0.2% in Q3 since the second quarter of 2014 while the Japanese economy shrank 0.6% sequentially in Q3. All these factors dragged global markets into the red with heavy selloffs in Wall Street in the fourth quarter.

Will Fed Turn Dovish & Trigger a Santa Rally?

Given the latest bloodbath in the market, a few market watchers definitely expect the Fed to act dovish in the December meeting as evident from the sudden decline in probability. We believe that even if the Fed goes for a rate hike, the policy outlook for 2019 will likely be dovish.

Against this backdrop, investors should keep a close track of the below-mentioned ETFs. These funds may move higher if the Fed comes up with a dovish decision or outlook.

Gold Mining

If the Fed turns dovish and the U.S. dollar remains subdued, gold prices should go higher and benefit mining ETFs like Sprott Gold Miners ETF (NYSE:GDX) SGDM.

Utilities

This rate-sensitive sector performs in a low rate environment. Also, the starting of 2019 is likely to be rocky. This situation should give Utilities Select Sector SPDR XLU a boost.

Treasury

If the Fed appears dovish, U.S. treasuries should soar, benefiting funds like PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF ZROZ (read: Treasury ETFs Surging: 5 Best Performers).

Momentum

If rising rate concerns ebb and trade tensions do not escalate, stocks may move northbound journey in the coming days, pushing iShares Edge MSCI USA Momentum Factor ETF MTUM higher (read: Will Powell, Valuation & Holiday Season Power Momentum ETFs?).

Dividend

Income or dividend ETFs shine in a low rate environment. O'Shares FTSE US Quality Dividend ETF OUSA, which yields 3.02% annually, may move higher in the near term.

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