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6 Stocks to Make the Most of a Rising Yield Environment
Strategists at JPMorgan think that rising bond yields indicate that the U.S. economy is booming. · Zacks
Swarup Gupta
Updated

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On Sep 21, yields on U.S. government securities took a pause after making steady advances throughout the week. The Federal Reserve has placed rates on an upward trajectory and is widely slated to announce another hike later this week. Strategists at JPMorgan (JPM) think that this is an encouraging sign for stocks.

Currently, the U.S. economy is in robust shape, as is evident from multiple gauges. The financial major’s strategists think that this will push investors to rotate out of defensive holdings into cyclical sectors.  

This is why they think that the financials, automotive semiconductor and capital goods sectors are good investments at this point. Adding these stocks to your portfolio would enable you to benefit from the strength of the U.S. economy.

Yields Surge Strongly in Recent Weeks

On Sep 14, 10-year U.S. Treasury Note yield hit 3% for the first time since Aug 2. The spike in the yield came immediately after the Commerce Department revised U.S. retail sales data for July from the initial increase of 0.5% to 0.7%. Moreover, the hourly wage rate surged strongly in August. (Read: Yield on US 10-Year Treasury Note Hits 3%: 5 Top Bank Picks)

Thereafter, the 10-year Treasury note yield jumped 3.3 basis points to 3.081% on Sep 19, the highest since May 17 and close to its seven-year high of 3.109%. The 10-year note yield had crossed the coveted 3% mark on Sep 18, the first time since late May. (Read: 5 Top Bank Stocks to Buy on Surging Bond Yields)

Strong Economy Boosts Yields

Strategists at JPMorgan think that a robust U.S. economy is boosting bond yields. The strength in the economy is more than evident from the bullish nature of several economic indicators.

Readings of gauges for manufacturing, wage growth, inflation and consumer confidence have all been encouraging recently. This is likely to make investors rotate out of defensive holdings into more cyclical stocks.

Cyclical Sectors are Good Bets

JPMorgan’s strategists think that financial, automotive, capital goods and semiconductor stocks are good bets in such a situation. Up to now, automotive and capital goods’ stocks have been largely unaffected by trade-related concerns. Investors have chosen to focus on the economy and robust earnings numbers.  

Financials are likely to gain as the yield spread widens, in turn boosting their margins. The slump in chip stocks is also likely to be temporary, unless the economy undergoes a significant downturn. Some analysts are already projecting an increase in spending on wafer equipment next year.

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