4 Reasons Why Markets Could Rally: Top-Ranked ETFs to Tap

Wall Street has been on a choppy ride since the start of 2022 due to rising rate worries and geopolitics. The 10-year U.S. Treasury yield hit a level not seen since late 2018 on Federal Reserve’s faster policy tightening plan. Higher inflationary expectations emanating from supply chain disruptions as well as higher crude prices made Fed members comfortable with this kind of aggressive monetary policy tightening.

St. Louis Fed President James Bullard said that he seeks rates rising by 3% to 3.25% in the second half of 2022. As a result, bond yields rose. The benchmark U.S. Treasury yield jumped to 2.84% on Apr 18, 2022 from 2.39% recorded at the start of the month. In January, IMF chief said that Fed rate hike could ‘throw cold water’ on global recovery.

In fact, James Bullard’s latest comments that a 75-basis point interest rate hike could be a possibility at an upcoming policy meeting to support the central bank’s fight against inflation may turn out as a great worry for some investors. But we would like to note that such threats may not act as massive deterrents to the upcoming market rally. Here’s why.

Market is Probably Oversold

CNBC’s Jim Cramer listed three primary reasons that can act as a support system for the market. The market was oversold, which makes it harder for stocks to plunge further. The stochastic relative strength index of the SPDR S&P 500 ETF SPY is 27.31, which means the ETF is close to the oversold territory. Meanwhile, the stochastic RSI of the Nasdaq-100 ETF QQQ is 17.91, pointing to the oversold territory (read: Guide to the S&P 500 ETF Investing).

Rising Rates Not Worrisome Always

Per the CNBC article, Cramer recalled 1994 when the Fed doubled rates and stocks still rallied. In the recent past, we have seen stocks withstanding even the 3% benchmark yield. For instance, the benchmark U.S. treasury yield touched 3.24% on Nov 8, 2018, having started the year at 2.46%. If we track the performance of the S&P 500 growth ETF SPYG, we will see the fund returning 10.3% during that period while the value ETF SPYV was down 0.5%.

America Better-Positioned in the Developed World

Another reason for the market’s latest resilience, according to Cramer, is United States being in a better position than other countries, due to America’s reopening economy and dependable energy sources.

The American economy expanded an annualized 6.9% on quarter in Q4 of 2021 while the Eurozone economy expanded 0.3% on quarter in Q4 of 2021. The Japanese economy grew by 1.1% sequentially in Q4 2021 while the British economy expanded 1.3% on quarter in the last three months of 2021.

U.S. Wage Growth Supports Sky-High Inflation to Some Extent

Although prices grew even more then wages, U.S. wages grew at the quickest clip in decades in 2021. Against this backdrop, below we highlight a few top-ranked ETFs that are in high momentum lately. Investors can tap those due to the above-mentioned market and economic scenario.

Top-Ranked ETFs in Focus

First Trust Materials AlphaDEX ETF FXZ – Up 19.7% Past Three Months; Zacks Rank #1 (Strong Buy)

SPDR Portfolio S&P 500 High Dividend ETF SPYD – Up 5.7% Past Three Months; Zacks Rank #1

Real Estate Select Sector SPDR ETF XLRE – Up 5.5%; Zacks Rank #1

Health Care Select Sector SPDR ETF XLV – Up 5.5%; Zacks Rank #1

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.