The United States economy added more jobs than expected in February. However, wage growth slowed in the period, which led analysts to bet on gradual rate hikes by the Fed. As a result, multiple analysts argue that current concerns regarding the potential impact of high wage growth are being blown out of proportion and the market can take relief from possibilities that interest rates will not be hiked four times this year.
Into the Headlines
The U.S. economy added 313,000 jobs in February — the highest since July 2016 — compared with a Reuters forecast of 200,000. However, this was not enough to make market pundits believe that the Fed will perhaps go on an aggressive rate hiking spree, as wage growth remained tepid.
Moving on to wages, average hourly earnings in the United States grew a mere 0.1% in February compared with 0.3% in the previous month. The February data showed a drop from the year-over-year increase in average hourly earnings to 2.6% from 2.8% in January.
“A strong jobs report with less wage inflation tells the market that current concern about the wage issue is overblown,” per a New York Times article citing Jonathan Golub, chief United States equity strategist at Credit Suisse. He added, “The market has to think that is terrific.”
In February, the S&P 500 entered the correction territory as strong wage growth in January made investors bet on aggressive rate hikes by the Fed. However, the recent weakness in that line has introduced some calm with respect to faster-than-expected rate hikes. Per a Market Watch article, CME’s Fed watch tool predicts three rate hikes for the year and that there is a 35% probability of four hikes in 2018.
Let us now discuss a few ETFs that are likely to benefit if the Fed adopts a gradual rate hike stance.
iShares Core S&P 500 ETF (IVV – Free Report)
This fund is a low-cost ETF that seeks to provide exposure to large established U.S. companies and tracks the S&P 500 index. The overall domestic market is expected to benefit from a gradual pace in rate hikes, as aggressive rate hikes increase borrowing costs and weigh on business activity.