By David Randall

NEW YORK (Reuters) – Some investors are preparing for a hawkish turn from the Federal Reserve by buying the cyclical, economically-sensitive names they gravitated to earlier this year, as expectations grow that the central bank is zeroing in on fighting inflation.

The year has seen a fluctuation in the gap between growth stock and value stocks, which includes companies like financials and banks. This is partly due to bets about how fast the Fed will normalize its monetary policy.

In recent days, signs that the central bank will move faster than expected in the face of surging consumer prices have slammed the shares of growth and technology companies, which have also been roiled by broader market volatility stemming from concerns over the spreading Omicron variant https://www.reuters.com/world/omicron-marches-biden-prepares-us-grim-winter-2021-12-03 of the coronavirus.

Some investors are also increasing their bets in value stocks to increase their chances of a better performance under tightening monetary policies. They rose earlier in 2021, when the U.S. economic recovery was complete. However, they fell later after investors started to gravitate toward technology shares.

“The Fed brings the punch bowl and they are the ones that remove the punch bowl,” said Michael Antonelli, strategist at Baird. “Markets are quickly repricing their view of the future.”

CME’s Fed Watch Tool showed that there was a 50 percent chance of the Fed increasing the federal funds rate by May. Futures are used to track interest rates in the short term. This is compared to around 31% early November.

These bets were triggered by comments made earlier this week by Fed Chairman Jerome Powell. He stated that the central bank would likely at its next meeting consider speeding up the dismantling of the $120 billion per month government bond-buying program.

Powell stated that the term “transitory”, which was used to describe current high inflation rates, is no longer suitable.

Stronger-than-expected elements in Friday’s U.S. employment report reinforced the view of a more hawkish Fed and weighed on growth stocks.

Ark Innovation ETF was one of the victims. It outperformed every other U.S. equity fund last year because it placed large bets in so-called “stay-at-home” stocks. The shares of Ark Innovation ETF plunged to 5.5% Friday amid sharp declines in the stock it owns.

Russell 1000 Growth is 2.4% lower in December’s first three days, while the value-focused index has increased by 0.9%. Year-to-date the indexes have risen by 21.1% and 16.6% respectively.

“The internals of the market are starting to reflect a faster rate hiking cycle and it’s the longer-duration growth stocks that are really selling off,” said Spenser Lerner, head of Multi Asset Solutions at Harbor Capital Advisors.

High yields can be a result of Fed expectations and can impact tech stocks that are high-valued. They can also weigh on growth stocks, which could lead to lower cash flow.

However, cyclical shares and value also benefit from stronger economies – which is often required for the Fed’s tightening monetary policy.

Lerner will focus on U.S. high-quality large-cap, cyclical companies with low valuations. He expects to benefit from a continued strengthening of the dollar in the Fed’s near future rate hikes.

The Fed will monitor the following data points in the coming week: the Friday release of core and consumer inflation readings.

Natixis Investment Managers Solutions Portfolio Strategist Garrett Melson stated that Powell’s willingness for the Fed to speed up its tapering program would likely lead to greater volatility over the next few months, as investors are prepared for higher rates. He predicts that financial shares will rise if the Fed supports are removed faster.

Some people doubt that the Fed will increase rates in 2022. Burns McKinney (a senior portfolio manger at NFJ Investment Group) believes that the Fed will not increase rates immediately after it has unwinded its bond purchases but rather gauge the economy’s strength without any monetary support prior to tightening in 2023.

In this scenario, the Fed could allow inflation to keep running for many months. This would boost the case for purchasing cyclical companies like Lockheed Martin Honeywell International Inc (NASDAQ) and Corp (NYSE:), both of which have a track record of increasing their dividends, may be able to benefit from the Democratic-led Infrastructure Deal that was passed by Congress in early November.

McKinney declared, “If the Fed hadn’t retired the phrase ‘transitory,” all the rest had.