The Federal Reserve delivered a surprise to markets on Wednesday, raising expectations for inflation this year and projecting an earlier return to interest-rate increases than it had signaled before.
The central bank held interest rates steady, but equity markets—including formerly high-flying growth names—reacted strongly to the news.
Though the Fed reached a unanimous decision to leave its benchmark short-term rate near zero, the new dot plot—a chart of individual members’ expectations of interest rates in the future—showed some expected rate hikes as soon as 2023.
This is a change from last quarter, when members had signaled no increases until at least 2024. Fed Chair Jerome Powell tried to downplay the importance of the chart, saying it was not a “great forecaster of future rate moves.”
That didn't calm markets that were suddenly spooked by the shift in estimates. Treasury yields jumped and equity markets fell, including tech-heavy names that have struggled for much of the year as inflation concerns grew and weighed on their prices.
ARK Funds Find Choppy Seas
One suite of ETFs that initially fell on the news were those from ARK Invest. These funds have been having a tough year after peaking in February and then seeing massive drawdowns over the following three months.
But in the middle of May, it seemed like these ETFs might be finally seeing some calmer waters. From May 14 through June 15, the ARK Innovation ETF (ARKK) was up 15.7%, the ARK Genomic Revolution ETF (ARKG) had gained 16.2% and the ARK Next Generation Internet ETF (ARKW) had rallied 13.1%.
However, with the Producer Price Index printing a shocking 6.6% climb in May, the largest 12-month increase on record, along with the Fed’s more hawkish turn, the ARK ETFs encountered some choppy waters once again.
QQQ & QQQJ Sailing Smoother
Though faring much better for the year than the ARK suite of funds, another set of ETFs that has been following a similar trading pattern over the last few months has been the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ Next Gen 100 ETF (QQQJ).
Charts courtesy of StockCharts.com
Though returns for the two ETFs have been relatively similar, these passively managed funds are tracking different baskets.
QQQ tracks the Nasdaq-100 Index, a benchmark that consists of 100 of the largest nonfinancial companies listed on the Nasdaq exchange.
QQQJ, on the other hand, tracks the Nasdaq Next Generation 100 Index, which targets the next 100 companies that, should they manage to grow, would potentially be eligible for inclusion in the Nasdaq-100. Both funds tend to be heavy in tech and consumer cyclical names.
The day after the conclusion of the Fed’s June FOMC meeting, initial jobless claims showed a surprise increase, coming in higher than both the previous week as well as last week’s estimates.
Bond yields fell following the news, soothing investors who were on edge after the Fed’s statement that had driven yields higher.
Though the labor market—and the economy in general—has been trending in a positive direction, mixed economic data could keep inflation in check. That could convince the Fed to keep the party going, potentially benefiting interest-rate-sensitive growth names.
Contact Jessica Ferringer at [email protected]