"History is the sum total of the things that could have been avoided"
Konrad Adenauer

Rate hike chatter is getting louder every day... Futures are now pricing in a 25% probability of a rate hike in June and almost a 50% chance of a hike in August. What's more now even a 50BP hike is a possibility. One interesting thing about Bernanke's Fed so far has been the fact that futures have a been a solid predictor of their actions...

source: ClevelandFed

source: ClevelandFed

Now what does that all mean for the markets? I think that the severe declines of the last week are the answer. But as usual in any market there will be winner sectors and losers. Below are some excerpts from a research paper that studied the impact of Fed's actions on various sectors called "Sector Rotation and Monetary Conditions" by C. Mitchell Conover; Gerald R. Jensen; Robert R. Johnson and Jeffrey M. Mercer

"We focus on the efficacy of a particular timing-decision variable advocated in prior studies, that being a simple gauge of the stance of Federal Reserve monetary policy. In particular, our objective is to determine whether there are potential benefits associated with using monetary conditions to guide a sector rotation strategy. Our results show that, in general, using announced Fed policy changes as indicators of when to shift a portfolio to a more aggressive or defensive posture, would have allowed investors to significantly enhance portfolio performance. Specifically, performance is enhanced by shifting into cyclical stocks following Fed changes that signal a more expansive monetary policy, while the appropriate response to a signal of a more restrictive Fed policy is a shift into defensive stocks."...

... "One of our more interesting and potentially useful findings relates to the rotation portfolio's performance during expansive relative to restrictive monetary periods. As indicated, the rotation portfolio assumes a defensive posture during restrictive monetary periods, and it is during these periods that the most prominent improvement in portfolio performance is observed. During restrictive monetary periods, the rotation portfolio returns approximately twice the benchmark return, yet the rotation portfolio has considerably less risk. This result suggests that the primary benefit associated with using monetary conditions to guide an investment strategy is that the strategy can be used to improve the disappointing performance associated with bear markets"

Below is the table of results of their findings slightly modified by me... The punch line is that resources sector actually on average does quite well? A bit surprising, but math is math...Another clear cut message- Technology does not do well during restrictive cycles- I will have to think hard about being so wide open in the IT field...On the other side just as expected- financials have not done too well when rates went up, neither did discretionary consumer goods...

P.S. STD- stands for Standard Deviation...

I think my MSN Portfolio needs a serious rebalancing...
skepticalcapitalist@gmail.com