The Federal Reserve meets on Dec. 13-14, and bond traders are pricing in the first interest rate hike of 2016. In fact, the Fed funds futures market indicates a rate hike of 25 basis points is basically a sure thing.
When speculation increases that the Fed is nearing an interest rate hike, investors’ behavior is usually predictable. Typically, investors shy away from longer-dated bonds (as they should) and rate-sensitive sectors, such consumer staples and utilities, in favor of lower-duration fixed-income options and cyclical sectors, including financials and technology. There are even some dividend exchange-traded funds (ETFs) designed to thrive as borrowing costs climb.
In other words, the standard rising-rates playbook usually focuses on domestic investments. Seems logical. After all, the Fed is the U.S. central bank, but against the backdrop of higher U.S. interest rates and hawkish Fed action, investors should not eschew international stocks.
That is particularly true because of a common occurrence around the time that higher rate expectations start climbing: The dollar rises, too. A strong dollar means foreign currencies are declining, potentially boosting earnings for international stocks that derive significant portions of their sales in the U.S.
Good news: The U.S. Dollar Index, which tracks the greenback against a basket of developed market currencies, is higher by more than 3% over the past month. Prolonged dollar strength courtesy of the Fed could be a boon for the following international ETFs.