The Best And Worst Sectors For Rising Interest Rates

Insurance and investment management giant Principal Financial Group (PFG, $84.10) is another example of a big financial firm being one of the best stocks for rising interest rates. But PFG is separate from algorithmic trading strategist similar names on this list because it has bigger scale and more stable operations. This sector tends to have above-average performance during inflation and increasing rates, thanks to higher oil prices.

Officials are struggling to take the measure of an economy and job market that are downshifting but holding up remarkably well despite rising prices and interest rates. Inflation, meanwhile, is slowing though not as rapidly as policymakers would prefer. Fed policymakers estimate they’ll nudge up the federal funds rate by another quarter percentage point this best oil stock year to a range of 5.5% to 5.75% in 2023, similar to their median forecast in June. They expect the Fed to stand pat the rest of the year because of signs the job market and inflation are cooling. And then we have asset managers that have money market funds, like Federated Hermes. In a zero-interest-rate environment, the company has to waive a lot of fees.

Like other industries on this list, healthcare is recession resistant and will probably always be in demand. Most consumers would reduce other discretionary expenses before healthcare costs, giving this sector an edge during rising inflation. Insurance companies can also perform well since they can earn higher yields on their bond investments. These companies usually invest in safe, reliable bonds to earn steady income that backs the insurance policies that they write. Financial services, which can include banks, insurance firms and brokerage companies, is one of the key industries that benefits from a sharp rise in interest rates. Commodity‐related products, including futures, carry a high level of risk and are not suitable for all investors.

On the other side, Procter & Gamble has been the weakest performer, with its stock rising by just about 4% year-to-date. I would note that if you’re looking for companies that will benefit from rising interest rates, you should look for companies with low deposit betas. You’re also looking for companies that are asset-sensitive, which means their interest-earning assets reprice faster than their interest-bearing liabilities.

Will Fed raise rates in September 2023?

We’re going from abnormally low to something a little bit more normal, which is higher than what it has been over the previous couple of years. Most people are not forecasting that we’re going to get into a severe recession with high unemployment rates and relatedly high credit costs. There is an inverse relationship between bond prices and interest rates, meaning that as interest rates rise, bond prices fall, and as interest rates fall, bond prices rise. If a company is seen as cutting back on its growth or is less profitable—either through higher debt expenses or less revenue—the estimated amount of future cash flows will drop. All else being equal, this will lower the price of the company’s stock.

  • The numbers come on the back of surging demand for goods and services which have outpaced the ability of supply chains to keep up following Covid-19 lockdowns.
  • On the other hand, when the Federal Reserve announces a cut, the assumption is consumers and businesses will increase spending and investment.
  • Those who aim to time the market with sectors will have the goal of catching positive returns on the upside.
  • The present trends seem unlikely to go away any time soon, and if anything, they seem likely to intensify.

Historically, when governments have overspent, rather than raise taxes, the easier route has been to weaken the value of the currency through inflation, making repayment of government borrowing easier. Perhaps the most important thing to remember when thinking about the effects of interest rate changes is that bond prices and returns move in the opposite direction of interest rate changes. So, assets that have a positive LTB beta will also go down when rates go up. One balanced approach when interest rates are rising is to stay invested and take advantage of late-stage positive momentum, but you should also prepare for harder times that are lurking around the corner. Take a look at the best stock funds and stock sectors when interest rates go up.

What Happens When Interest Rates Rise?

Generally, interest rates and the stock market have an inverse relationship. When interest rates rise, it can make borrowing money for a company more expensive, which means they have less money to invest back in the company and less cash flow stability, which typically puts pressure on share prices. But flipping to a shorter-term lower-yielding bond model has a trade-off, as short-term bonds provide less income earning potential than longer-term bonds. Times of rapid growth often occur at the same time as rising interest rates. For instance, between 2009 and 2020, the economy was growing rapidly and the S&P 500, a barometer for the U.S. stock markets, experienced one of its longest bull markets ever. During this period, momentum investors, measured by the MSCI Momentum Index, saw positive returns in all years except 2018.

U.S. healthcare is another unique sector since it’s growing faster than the rest of the economy. National health spending is predicted to grow by 5.4% annually through 2028 to a total figure of $6.2 trillion, or 19.7% of the total U.S. This growth has been caused by advances in technology, an aging population and greater access to disease treatments. You should always bear in mind the current state of the economy when you’re creating or making changes to your portfolio.

This includes when the economy is improving and is healthy, or when it’s overheated or inflationary. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. Rather than inflation, the greater risk to the residential REITs is another recession like the one that began in 2007.

Sector trends

If the interest rate that the economy can handle without slowing down has permanently increased, it will take higher borrowing costs to cool the economy if it begins to overheat. Meanwhile, rising rents and increased costs to travel and to access other services were tempered by the shrinking prices of used cars, furniture and other products. Still, generally higher oil prices are pumping up the price of gas according to AAA, and in turn, gas was the primary driver of August’s higher inflation rate. Gas prices increased 10.6% last month though they were 3.3% lower than a year earlier and far below the $5 peak also reached in 2022. But in August, gasoline costs drove prices sharply higher and core inflation picked up as prices for rent, travel and other services accelerated, according to a different inflation gauge called the consumer price index.

ways to profit from an interest rate increase

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

The Federal Reserve is the hub of the nation’s banking system, working behind the scenes to make sure the economy is functioning and stable, and that there is a balance between the nation’s financial vitality and consumer interests. Its goal is “maximum employment, stable prices, and moderate long-term interest rates,’’ according to its website. Finally, there’s also a level of “built-in inflation” within economies, with central banks like the Fed wanting inflation to stay at a certain level. In the U.S., that goal is 2%, meaning businesses can boost prices by 2% annually, and that shouldn’t be a hardship for consumers. That’s also the typical range for cost of living boosts by employers.

Why do rising interest rates generally depress stock prices?

If you look at the Fed’s Summary of Economic Projections report, you’ll find the Fed’s dot plot. The dot plot is a visual representation of where individual Fed officials predict interest rates will be for years down the line. The dot plot was first created in late 2011 and was intended to add additional transparency to the Fed’s decisions about monetary policy. In the latest dot plot, the majority of Fed officials indicated a target Fed funds rate between 4% to 4.75% would be appropriate for 2023. The interest paid out on everything from savings accounts to CDs to Treasuries has risen as the Fed has raised rates.

“We expect global fry demand to remain resilient, noting fry attachment rates continue to be above pre-pandemic levels.” Historically, solar stocks have experienced plenty of ups and downs. That’s not How to pick a stock just because of the challenge with demand and adoption trends, but also because of more practical concerns like supply-chain disruptions and input costs that are important for any manufacturer.

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