Recession vs inflation: Rising interest rate winners and losers as Fed tightens the screw
By Joseph Toppe
18:42, 29 July 2022
Now that the US Federal Reserve has announced its latest interest rate hike to cool inflation and the market has priced-in a potential recession, the winners and losers on Wall Street are beginning to surface.
From the usual havens in utilities (XLU) and real estate (XLRE) during economic downturns, to a return to growth stocks in big tech like Apple (APPL) and Amazon (AMZN), traders are now positioning themselves for the bear market rallies to come.
Winners: The usual suspects + Mega-cap tech
Edward Moya, senior market analyst for OANDA in New York told Capital.com, “A strong recession signal has brought defensive trading back to life on Wall Street, with utilities and real estate soaring.”
“The second consecutive quarterly contraction suggested that stagflation is here, as traders prepare for additional bear market rallies down the road,” he said.
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Real Estate (XLRE) price chart
Moya added, “Mega-cap tech will also become a safe-haven trade during the recession.”
“The go-to trade on Wall Street will be companies rich with cash, decent product cycles, and earnings momentum, while the traditional investor may gravitate towards typical defensive stocks,” he continued. “Massive earnings from Apple and Amazon are also providing a boost for risk appetite."
Amazon (AMZN) price chart
Losers: Low earnings companies + US economy
With inflation at its highest level in four decades, ongoing supply chain issues related to the Covid-19 pandemic, and the likelihood of a recession, “Traders should avoid companies with no earnings and high debt,” Moya warned.
While the market anticipates a slower pace of tightening from the Fed, “it is premature,” he said. “Inflation will likely not ease quickly, so the aggressive stance to fight inflation will not drastically change.”
US economy: Burned by inflation, stalled by potential recession
In an interview with Capital.com, Joey Von Nessen, a research economist at the University of South Carolina’s Darla Moore School of Business, said “two consecutive quarters of negative growth is concerning, but part of what’s driving the slowdown is temporary.”
According to Von Nessen, there are two major factors driving today’s GDP estimates including high inflation and rising interest rates, and “it can be observed in the housing markets, where demand has pulled back in 2022 as mortgage interest rates rise.”
“However, we’re also in a period of transition as consumers slowly return to normal spending patterns,” he added. “The bottom line is that uncertainty remains high as we look ahead to the second half of the year, which will likely translate into increased market volatility.”
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