Goldman Sachs Group Inc has warned investors to be prepared for a more hawkish Federal Reserve. Chief U.S. equity strategist David Kostin foresees the Fed doing something it hasn’t done in over a decade – raise rates multiple times. As such, he has advised investors to turn to a more dividend-centric strategy to overcome the contracting monetary environment.
“The goal for managers is to stay alive when the Fed hikes rates one, two, or three times this year,” he wrote to clients.
Goldman Sachs Group Inc Says Fed May Act Next Month
Kostin expects the first interest rate hike to come as soon as next month amid the strength in macro economic data. Resilience in the jobs market, along with a dip in the unemployment rate, could accelerate labor inflation, he said, which would then force the Fed to act. Kostin forecasts two more hikes before the end of 2016.
The futures and options market is pricing in a single rate increase, while some members of the Fed have been crying for two hikes. Against such mixed signals, emanating from various quarters, Kostin reckons investors would be better off focusing on dividend plays.
“We advocate a dividend-oriented strategy given the uncertain pace of tightening. Simply put, stocks with a combination of high dividend yield, high dividend growth and low valuation should outperform regardless of Fed policy during rest of 2016,” he added.
Goldman Sachs Group Inc’s dividend growth basket includes names like Honeywell International, Reynolds American, Discover Financial Services and Wyndham Worldwide. Kostin sees these stocks increasing their payouts by up to 13 percent in 2016, compared to the S&P 500 Index’s average of 6 percent.
Fed Gets a Pat on the Back from Warren Buffett
Billionaire investor Warren Buffett said that the U.S. Federal Reserve and other key policy makers have generally been doing a good job, but that it was difficult to estimate all the ill effects of interest rates remaining low for such a prolonged period of time.
Speaking to CNBC on Monday, Buffett said that no one could predict the consequences of such low rates because it had never happened in the past. However, he was quick to point to the fact that the U.S. economy had managed to steadily recover from the depths of the 2008 crisis. Near zero rates from December 2008 to December of last year had helped push the Dow over 100 percent.
Buffett appeared on CNBC after a marathon five hour annual shareholder’s meet at Berkshire Hathaway’s Omaha headquarters.