As interest rates rise and fall, some sectors benefit more than others, but which ones? And what stocks will go up this year if rates rise?
The Federal Reserve typically raises interest rates when the economy is growing and lowers them when the economy is slowing. You would think then that as the Fed hikes rates, investors would applaud the fact that the economy is doing well and buy stocks. But the reverse is often true because markets discount what has already happened and anticipates what will happen – higher borrowing costs that hurt corporate profits and consumers’ discretionary spending.
As interest rates show signs of increasing in the year ahead, some stocks will have a tendency to rise more while others get whacked! The financial, consumer staples and industrial sectors are among those that could win. Here’s why:
Because profit margins for banks increase as interest rates increase, the financial industry is a rare cohort of stocks that benefits from rising rates.
As rates go up, banks, money managers, insurance companies and brokers have typically tended to benefit from that rise as net interest margin goes up.
Some examples of financial industry stocks that have the potential to perform well are:
- JPMorgan Chase & Co. (JPM): a brand name bank globally.
- TD Ameritrade Holding Corp. (AMTD): a brokerage that could see more investment activity as interest rates rise.
- The Travelers Companies, Inc. (TRV): an insurance company that makes more from higher interest rate bonds.
Consumer staples are regarded as being positively affected by rising rates because a better economy translates to a rise in employment, a more stable housing market and the possibility of consumers willing to spend more money because, well, they have more money.
Regardless of economic outlook, consumer staples are always in need – think toilet paper, laundry detergent and so on. So while high-flying growth stocks take a haircut during rising interest rate environments, consumer staples often pop as capital flows towards the stability of proven cash flows.
Here are some promising options within the consumer staples sector that investors might want to pay close attention to in the months ahead:
- Albertsons Companies Inc. (ACI) is a popular grocer that owns and operates many food and drug stores and also provides fuel, merchandise and other goods.
- Kohl’s Corp. (KSS) is a retailer that has seen its stock price increase not only as a result of increased interest but also because of a potential takeover of the company.
- Costco Wholesale Corp. (COST), an always-dependable consumer staple stock, is a company that owns and operates popular member-only warehouses across the world.
In addition to financials and consumer staples, the industrial sector is another area that typically sees success during times of increased interest rates.
Industrial stocks go up because industry itself is booming. When companies are expanding across the country or the globe, homes are being built at greater rates and demand for industrial goods and services rises. For example, more construction is a clear indicator of a healthier economy, and the industrial sector is one of the first to reap the benefits of this. This translates directly into increased performance on the stock market.
Some good examples of industrial sector stocks to watch are:
- Ingersoll-Rand PLC (IR) is a company responsible for the manufacturing of compressors, pumps, vacuums, blowers, fluid management systems, power tools and lifting equipment.
- The 3M Company (MMM) is a manufacturer that produces over 60,000 products for several different brands including Ace, Command, Filtrete, Post-It, Scotch-Brite, Nexcare and more.
- Waste Management (WM) is a seemingly odd pick for an industrial stock to watch that makes more sense when considering that waste will increase — and, as a result, Waste Management profits will increase — as construction, manufacturing and industry increase.
The Bottom Line: Which Stock Will Go Up This Year?
After over a decade of low interest rates — practically as close to zero as to be nonexistent, the Federal Reserve has made it clear that interest rates are likely to rise in the coming year. Possibly, rates could rise as soon as March.
This move from the Fed has come about as a means of stemming the rising tide of inflation. As interest rates rise to mitigate the increasing inflation, there’s little doubt that this increase will have a direct impact on the stock market at large.
Whether or not this impact is positive or negative on your investment portfolio depends on your exposure to sectors that will suffer from or benefit from rising inflation. It’s important to plan for a future increase in interest by investing in stocks that perform well during a rising interest rate environment. No matter if you prefer financials, consumer staples, industrials or a mix of the three, these sectors should balance a portfolio that has holdings in interest-rate sensitive sectors, such as high growth stocks.