Experts React To Market Sell-Off: 'We Prefer The Financials And Banks'

The SPDR S&P 500 ETF Trust SPY was down 1.9% in midday trading on Tuesday. Tech stocks were hit particularly hard as investors dumped Nasdaq stocks over concerns about rising 10-Year Treasury bond yields.

Treasury yields are now near their highest levels since June after the Federal Reserve said last week that it could begin tapering its $120 billion in monthly bond purchases “soon.”

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The budget showdown in Washington, D.C. has also spooked investors. Treasury Secretary Janet Yellen warned Congress on Tuesday that lawmakers must raise the debt limit by Oct. 18 or a government default will be triggered.

Investors Too Bullish? Brian Price, head of investment management for Commonwealth Financial Network, said Tuesday the debt ceiling standoff will likely ultimately be resolved as it has multiple times in the past. Yet he said stock market sentiment may also be responsible for the recent trading action.

“Some may believe that sentiment has become too ebullient, which contrarians believe sets the stage for a market pullback like we’re seeing today. If interest rate increases moderate from here on the back of declining inflation expectations, then it wouldn’t surprise me to see the market resume its march higher as we move into the fourth quarter,” Price said.

Fed Moving Markets: Charlie Ripley, senior investment strategist for Allianz Investment Management, said the market sell-off is another reminder of just how much influence the Fed has on the U.S. stock market.

“This is an uncomfortable period for market participants as the removal of Fed support will be underway soon and equity markets will have to learn how to stand on their own again. However, we should be reminded that it is unlikely the Fed would move forward with tapering bond purchases if they didn’t think the economy was ready,” Ripley said.

Pricing In Rate Hikes: Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said expectations of potential interest rate hikes in 2022 may need to be priced into the stock market.

“It seems likely that yields will move higher between now and year end and, if that’s the case, then another pivot to Value and Cyclicals is likely to happen again as well. Specifically, we prefer the Financials and banks in particular, as higher interest rates are explicitly good for financial companies as they make money on the net interest margin and, in the event interest rates stabilize and the economy continues to improve from last year, credit quality will remain high and loans will continue to perform well,” McMillan said.

Benzinga’s Take: Traders who want to take the opportunity to buy the dip in cyclical stocks, value stocks and bank stocks should consider ETFs such as the Consumer Discretionary Select Sector SPDR Fund XLY, the Vanguard Value Index Fund ETF VTV and the SPDR S&P Bank ETF KBE.