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A Sign of the End of the Tightening Cycle

The end of Fed interest rate increases may be in sight. In previous cycles, the end of Fed interest rate hikes has coincided with a local trough of the MZM. The cycles in 1989 and 1995 ended with MZM below 0% growth on a year-over-year basis. MZM is just barely above zero. For the week of 5/23, MZM growth was less than one-half of one percent at 0.4% with a downward trend. One more interest rate increase may push it into negative territory.

Dallas Fed president Richard Fisher gave some clues on the length of the Fed's current interest rate cycle with an analogy to baseball. In a CNBC interview he said "We're clearly in the eighth inning of a tightening cycle". Additionally, in a Wall Street Journal interview he continued the baseball theme with the statement "The next meeting in June is the ninth inning. We'll take a look after that. We may have to go into extra innings in this contest against inflation." The next Federal Open Market Committee (FOMC) meeting is scheduled for June 29-30.

http://www.post-gazette.com/pg/05153/514593.stm

So with the end in sight of the tightening cycle, what is an investor to do? First, watch the yield curve. It should be our best indication that the Fed has raised rates too far. As long as the yield curve begins to rise, it may be a good time to add exposure to sectors that are most hurt by rising rates. Financials and utilities both fit that category. However, utilities have performed very well over the last year, while financials have lagged. Year-to-date thru June 3, the utilities sector is up 10% while financial sector is down more than 6%.

Momentum investors may opt for utilities while contrarian or value investors should consider financials. Perhaps some of each.

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