Are Red-Hot Factor Funds Vulnerable To Ongoing Rate Hikes?

Update: see the Labor Dept’s payrolls data for a comparison vs. ADP’s estimate at chart at end of this article.

Yesterday’s news that US companies accelerated hiring in June strengthens confidence that the Federal Reserve will continue to lift interest rates to tame inflation. In turn, equity risk factors with the strongest gains this year may be vulnerable if a renewed run of hawkish monetary policy unfolds.

Using a set of ETF proxies shows that Invesco S&P 500 High Beta ETF (SPHB) is currently leading the field so far in 2023 with a strong 21.1% return, as of Thursday’s close (July 6). The iShares S&P 500 Growth ETF (IVW) is a close second via a 20.1% rally. The broad US stock market, by comparison, is up 15.9%, based on SPDR S&P 500 (SPY).

For a handful of equity factors the risk of red ink has already arrived for 2023. Although most risk factors are posting year-to-date gains, high dividend yield (VYM) and momentum (MTUM) are the exceptions. Both funds have been stumbling all year, alternating between modest/flat results and losses.

Market expectations have been pointing toward another quarter-point rate hike at the next FOMC meeting on July 26, following a pause at June’s meeting, based on Fed funds futures. The main change after yesterday’s hot jobs data: the crowd is now considering a higher chance that the Federal Reserve will continue to lift rates later in the year. Although the implied probabilities still favor a one-and-done forecast, confidence has faded that rates will peak after the July 26 meeting.

A key variable is how today’s US payrolls report for June from the Labor Department compares. As of this writing (roughly 90 minutes ahead of the 8:30 am eastern release), economists are looking for a softer but still solid increase in hiring, according to’s consensus point forecast. If the numbers show a strong upside surprise, in line with the ADP report, the hawkish outlook for Fed policy will strengthen, creating more headwinds for the highest-flying equity factors.

Shortly after this article was originally published, the Labor Dept. reported that its estimate of US private payrolls rose modestly in June, far below ADP’s estimate:

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