Best Stocks and Sectors for Rising Interest Rates

As proof of how LW can hang tough, the consumer staples stock is up an amazing 48% in the last 12 months, even as the rest of Wall Street has struggled. That’s in part because of what is expected to be a nearly 20% increase in revenue this fiscal year as the foodservice business normalizes after pandemic-related disruptions. However, it’s also because investors know they can rely on this profitable operation regardless of any short-term pain for the economy in 2023, which makes LW one of the best stocks for rising interest rates.

Moreover, life and annuity providers will face less pressure on the margins they earn from legacy blocks of annuity and insurance premiums with high minimum rate guarantees. With rising rates, they may offer fewer buyouts on products like fixed annuities. Conversely, we may see increased activity in blocks that were too expensive to sell under a low-interest-rate environment, given the bid-ask gap between buyers and sellers. The first scenario would be that the Fed or monetary authorities across the globe raised interest rates too much and, therefore, have to cut interest rates in order to help the economy.

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As you assess your own circumstances, it’s fair to anticipate that equity markets may continue to exhibit price volatility in the near term. Nevertheless, assuming the Fed succeeds in tempering inflation and the economy ultimately recovers, stocks will continue to represent a key component of any balanced portfolio for long-term investors. The Fed has already raised interest rates three times in 2023, following seven rate hikes in 2022. While Fed Chair Jerome Powell in early May indicated that the Fed may be ready to pause rate hikes at its next meeting in June, he also stated that rates will remain elevated for a period of time. According to Powell, “it would not be appropriate to cut rates and we won’t cut rates,” at least for now.5 Inflation’s growth rate slowed since mid-2022, but it continues to exceed the Fed’s target. “It’s clear that the Fed policy shift created great change in the markets,” says Bill Merz, head of capital market research at U.S.

Strategies for a Rising-Rate Environment

They can carry risks, such as fluctuations in stock prices and potential changes to dividend policies. It’s important to evaluate your risk tolerance and investment goals before making any investment decisions. Sectors that are also very vulnerable to the rising rates are broadcasting and media, technology, and telecommunications. Those sectors are very leveraged, and those levels of indebtedness, in combination with the rising interest rate environment, will continue to increase their cost of borrowing. Interest rate hedged bond strategies are structured to virtually eliminate interest rate risk while retaining a full exposure to credit risk.

In March, the Federal Reserve set into motion a cycle of rate hikes that could last well into 2023. That’s bad news for borrowers—but could be good news for sectors that historically have benefited from higher interest rates. Manufacturers and sellers of kitchen appliances, cars, clothes, hotels, restaurants, and movies also benefit from the economic health dividend.

Information technology

Moreover, industry balance sheets and capital positions are currently quite robust. Accordingly, reserve risk deterioration would likely require several years of higher inflation to recognize adverse development flowing through earnings. “Most of the hardest hit stocks in 2022 were those with premium price-to-earnings (P/E) multiples,” says Haworth. In other words, stocks that are considered “pricey” from a valuation perspective suffered the largest price declines. This included secular growth and technology companies that enjoyed extremely strong performance since the pandemic began.

• The change in the underlying stock market environment stands in sharp contrast to the fairly favorable economic landscape that dated back to the waning days of the financial crisis in 2009.
• In the first quarter of 2023, the economy grew at an annualized rate of just 1.1%.1 Economic weakness can slow down business activity, which potentially detracts from corporate earnings, and ultimately pressuring stock prices.
• However, investing in dividend-paying stocks can provide a steady stream of income that can be attractive to investors looking for yield in a rising interest rate environment.
• The economy may be fairly healthy when rates begin rising, but rising rates often signal the start of the end of an economic cycle.

As consumer spending increases, the more car purchases and home sales there are, which translates to more insurance policies. But once consumer spending starts to fall, the number of new policies will decline. The same goes for investors, as the higher rates also make saving more appealing, which can cause a shift away from risk-on assets – such as stocks. The increases in interest rates does also make borrowing more difficult for companies as the cost of lending goes up, which drives down business growth and expansion. So, as consumers focus more on saving, it can lead to a decline in profits for businesses. The aim of rate rises is to slow growth down, not stop it in its tracks.

Investing Amid Rising Rates: What to Know

PRC investors must have the relevant qualifications to invest in such securities and must be responsible for obtaining all relevant approvals, licenses, verifications and or registrations from PRC’s relevant governmental authorities. Rebalancing does not protect against a loss in declining financial markets. Investors should consult with their tax advisor before implementing such a strategy. Hanes is a consumer apparel company that makes its namesake undergarments, as well as Playtex and Maidenform bras and Champion athletic wear. On top of that, inventories are actually tracking a bit below the prior year’s level to prove that Hanes is being responsible with its operations and isn’t overproducing out of unwarranted optimism. The market is currently pricing in a 25 basis point rate hike (0.25%) at the Fed’s early February meeting, and another one at its March gathering, according to CME Group.

The firm was founded back in the 1950s as a data and analytics company, and eventually developed a way to compile credit histories and “score” the spending and borrowing history of consumers and businesses. Its now-popular FICO scores help determine not just whether someone qualifies for a credit card or a mortgage or auto loan, but how much interest they will pay. Life insurers had a rough go of it during the low interest rate environment. However, with interest rates rising, these companies will see new investments get a boost, which could improve their profitability in the coming years, especially if rates indeed go higher for longer. Higher interest rates help these companies, which can now invest premiums and generate higher returns, putting them in a better position to offer products to their customers with more attractive guarantees. Despite the short-term risk involved with higher interest rates, banks are happy for rates to stay higher for longer because it will ultimately improve the spread they earn on interest, boosting profits.

Asset adequacy and capital requirements

For life and retirement providers, higher interest rates will broadly reduce reinvestment risk and make rate guarantees less expensive from an economic standpoint. However, too sharp a rise will introduce disintermediation risk, which will negatively impact balance sheets. (Carriers should https://forexarticles.net/fusion-markets-forex-broker-review/ keep in mind the mass lapse scenarios of the early 1980s). In contrast, a gradual change in rates will mitigate these risks, but carriers would need to reset rate guarantees and pricing more frequently than they have recently in order to respond to market pressure on book value guarantees.