Now is the right time to boost your portfolio’s exposure to tech, along with other recently out-of-favor sectors of the marketplace.
Contrary to popular belief, U.S. stocks generally did better during Fed tightening cycles than during Fed easing cycles. That’s because Fed tightening occurred in the second half of U.S. business cycles 67% of the time, and Fed easing overlapped with U.S. economic recessions 67% of the time, according to Talley Léger, senior investment strategist at Invesco.
Léger expects that after their recent correction, U.S. large-cap growth stocks will resurface, given tighter fiscal and monetary policy coupled with slower activity.
For investors, this means that it would be unusual for the stock market advance to end this early in a Fed tightening cycle, according to Léger.
“In my view, the last hike matters more than the first,” Léger writes. “Until then, I remain a buyer of stocks on the dips.”
Looking at U.S. equity performance during Fed tightening cycles since 1983, the S&P 500 Index went up in six out of the six Fed tightening cycles, according to Léger.
Similar to U.S. stocks, global equities have generally done better when the Fed was raising interest rates. Indeed, style, size, U.S., and non-U.S. equities all performed better when the U.S. authorities were tightening monetary policy; however, not a single category ranked in the top three more than 50% of the time in our sample, according to Léger.
As a combined category, however, U.S. large-cap growth stocks did top the leaderboard in the 2015–2018, 1999–2000, 1994–1995, and 1983–1984 Fed tightening cycles.
In Fed tightening cycles, tech (growth) outperformed financials (value) most of the time, according to Léger, who believes that tech stocks will become interesting to investors once again after their recent correction, consistent with the expectation for continued U.S. large-cap growth outperformance.
“In my view, the combination of slower economic and earnings growth, exacerbated by tighter fiscal and monetary policy, points to higher quality positioning in large-cap growth stocks — and I believe the recent selloff presents another attractive entry point,” Léger writes.
One way for long-term investors to add growth and tech names to their portfolios is to eschew stock picking and opt for a highly-rated ETF such as the Invesco QQQ ETF (QQQ) or the Invesco NASDAQ 100 ETF (QQQM).
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