One thing has become painfully obvious, after Friday’s consumer price index reading came in at a scorching 8.6% year over year, the highest reading since 1981. The Federal Reserve has been woefully behind the proverbial curve, and it may have to step on the interest rate increases pedal pronto. Former Reagan advisor and economist Art Laffer said last week that Fed Chair Jay Powell should go “full Paul Volker” and jack interest rates up huge.
While the federal funds rate likely will not go to the incredible 20% level that American consumers faced in June of 1981, there are rumblings across Wall Street that the Fed could get more aggressive at this week’s meeting and the expected 50-basis-point hike could turn into a 75-basis-point increase. While a long-shot a month ago, it seems very plausible now, with inflation totally out of control.
Jefferies Chief Economist Aneta Markowska is one on Wall Street who thinks the 75-basis-point increase is indeed a possibility, and the Jefferies team noted this in a recent commentary:
Goods inflation has largely continued to roll, and service inflation has continued to rip. And sure, it’s summertime and folks have spent a few years being both cooped up and making money on speculative trading – travel is going to be better than the macro would otherwise support. But there are two very troubling aspects: 1) the cost of shelter continues to rise and that is sticky inflation and 2) the strong demand environment, mixed with supply constraints and shocks, has caused energy commodities to also put upward price pressure on the US consumer. With newfound confidence that inflation isn’t just going to go away soon, we remain of the view that several hundred more basis points of Fed Funds are probably on the horizon.
Typically in a rising interest rate environment, financials benefit from higher rates through increased profit margins. Industrials, consumer names and retailers also can outperform when the economy improves and interest rates rise. While the economy may not improve in the near term, it is likely with the country reopening after two years of COVID-19-induced stagnation that things could at least trend slightly better.
Investors worried about rising rates and stock volatility may be drawn to the Dividend Kings. These are the 44 companies that have raised the dividends they pay to shareholders a stunning 50 consecutive years or longer. We screened the Dividend Kings list for the stocks in sectors that could hold their own in the potential rising-rate scenario. The following seven are rated Buy at major Wall Street firms, but it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
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