Sectors that benefit from rising interest rates: Sectors Affected by Interest Rates: Which Will Benefit & Which are at Risk?
To find such opportunities, it can be helpful to examine the sectors within the stock market that tend to benefit from higher rates in a healthy economy. Life insurers make money on the spread between the amount earned on their investments and the amount of interest paid out on products like whole life insurance or annuities with a guaranteed rate of return. When interest rates are low, life insurers’ earnings capacity compresses, and they risk not being able to meet their obligations on these products.
When interest rates are on the rise, the economy is typically nearing a peak. This is because the Federal Reserve raises rates when the economy appears to be growing too fast. When interest rates are on the rise, the economy is typically nearing a peak, since the Fed uses interest rates to control inflation. Consumer discretionary is an economic sector comprising non-essential products and services that individuals may only purchase when they have excess cash. Andrew Bloomenthal has 20+ years of editorial experience as a financial journalist and as a financial services marketing writer.
Discover Financial Services (NYSE:DFS)
Looking back at past cycles, we’ve found that certain sectors generally respond favorably to rising interest rates, while others respond more neutrally or even suffer. In a rising interest-rate environment, HBI is a great example of a stock with good value and decent growth prospects in an otherwise uncertain stock market. 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. Many economists believe that the nation’s overall housing supply remains limited so prices for real estate will stay elevated as the sector is focused on quality over quantity. That could bode well for PennyMac as it may not be swamped with buyers, but it can depend on high-quality and high-margin loans as rates stay high.
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And as interest rates rise, the firm can command bigger margins from homebuyers as a result. Historically, solar stocks have experienced plenty of ups and downs. That’s not 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. But with shares of FSLR stock doubling over the last 12 months, including a run of more than 40% in the last three months alone, it’s hard to argue that the sun isn’t shining on the sector right now. However, with more money in the marketplace and more consumers more comfortable with their finances, sectors dealing with staples can also do well. Hygiene products, household goods, and food all benefit when consumers feel more confident.
For investors worried about how to navigate rising rates and related challenges in the stock market, FSLR may be one of the best growth stocks to consider. If CPI continues to trend lower, the stock market will continue to react positively since companies benefit from a lower cost of borrowing. Moreover, bond investors will be reallocating some of their investments to stocks as inflation trends lower. Many insurance companies rely on bond investments — particularly long-term Treasuries — as base investments. More stable savers who have money stowed away in bonds, CDs, high-yield savings accounts and money-market funds may also be able to buoy themselves and take advantage of rising interest rates. Times of rapid growth often occur at the same time as rising interest rates.
Those who want to take advantage of the environment could consider stocks in the relevant sectors listed in this article. Alternatively, investors could set themselves up in a defensive position. In this case, they could invest in consumer staples, healthcare, and possibly physical assets like gold and precious metals ETFs. Bank stocks generally welcome higher interest rates, as long as they are introduced gradually. Traditionally, banks make money on the spread — the difference between the interest income earned on loans they issue and the interest expense paid out on deposits used to fund those loans.
The financial sector consists of companies that provide financial services to commercial and retail clients. Financials benefit from higher rates through increased profit margins. If you do make adjustments to your sector allocations, consider keeping them small—no more than a few percentage points. And most importantly, the value proposition of FSLR stock is largely independent of the interest-rate environment.
Marathon Petroleum Corporation (NYSE:MPC)
The financial sector has historically been among the most sensitive to changes in interest rates. With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates. The COVID-19 pandemic had a pronounced, depressive effect on global financial markets. The deep uncertainty about economic activity led to the Federal Reserve slashing the federal funds rate to a range of 0% to 0.25%. It stayed at these levels until March of 2022, when the Fed realized it needed to raise rates to combat rampant inflation. Companies in the financial sector can benefit from higher rates, which boost earnings for banks or life insurers.
It also means that banks can earn more from the spread between what they pay and what they can earn (from highly-rated debt like Treasuries). Information Technology is a high-growth sector with little direct exposure to interest rates—rather, it’s driven more by business investment. That said, the sector typically performs well in the early months of a rate-hike cycle before higher rates have had time to cool things down. When the Fed takes a slow approach, meaning it doesn’t raise rates at consecutive policy-setting meetings, the stock market has tended to do well in the months following a new cycle. Life insurers had a rough go of it during the low interest rate environment.
This sector tends to have above-average performance during inflation and increasing rates, thanks to higher oil prices. Consumer cyclicals are stocks of companies making consumer products that are greatly influenced by the ebbs and flows of the business cycle. A tight monetary policy refers to central bank policy aimed at cooling down an overheated economy and features higher interest rates and tighter money supply. Raising interest rates leads to higher borrowing costs, which can lead to a slowdown of growth, which in turn helps to control inflation. 1Market expectations of future rate hikes are derived from federal funds futures for December 2022, 2023, and 2024. The sectors that have historically performed best—and worst—vis-à-vis the broader market in the year following the first in a new cycle of rate hikes.
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For example, most people know that health insurance is extremely important, especially since healthcare costs are the leading cause of bankruptcy in the U.S. This industry can also see higher demand during tough times, including pandemics. The two factors that can make or break real estate investments during this time are debt profiles and industry.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Rising inflation has the Federal Reserve aggressively increasing interest rates to cool down demand. Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services. But that lack of volatility cuts both ways, and the appeal of this stock to many investors is, in fact, this slow-and-steady performance. Stability, not rapid share price appreciation, is the name of the game.
These 4 Key Sectors Can Be Especially Profitable In A Rising Interest Rate Environment
You’ll need to do your own research to determine the best stocks and funds that fit you and your investment portfolio. But in general, choosing growth stock fundscan help you take advantage of an environment of rising interest rates. You’ve adjusted your fixed-income portfolio to account for rising rates. In a strengthening economic environment, also consider adjusting your equity investments to favor companies that may benefit from accompanying rising rates.
Furthermore, there are other investments that appear resilient and reasonably insulated from any rate-related disruptions on Wall Street. In fact, the relationship between interest rates and insurance companies is linear, meaning the higher the rate, the greater the growth. Financials tends to profit from rising interest rates as banks and other lenders raise rates on borrowers. Typically, longer-term interest rates rise as the Fed starts hiking rates due to the strong growth that is stoking inflation. However, if the Fed has to act forcefully to tamp down inflation—which raises concerns about economic growth—Financials could take a hit.
These stocks have been ranked according to the hedge fund sentiment as of Q3 2022. However, there are some smart moves you can make to invest in the best stock funds and sectors in a rising interest rate environment. When interest rates are at or near historical lows, it may be wise to prepare for when rates rise. A transition from a low interest rate environment to one with rising rates is often accompanied by a final move upward for stocks before a decline ensues.
If you have a portion of your portfolio in money market funds, CDs, and high-yield savings accounts, you can see a benefit from rising rates. Here are some examples of stocks and funds that investors trying to take advantage of rising rates. These are not recommendations nor are we advising that you buy them.
When creating your portfolio strategy, it makes sense to consider what sectors are affected by interest rates and to consider how that might impact your performance. Consider consulting with an investment professional before making changes to your portfolio based on concerns about rising interest rates. If you have high-interest variable debt, like credit cards, rising rates can cause financial issues. It’s harder to pay off debt when more of your monthly payment goes toward interest charges. Bond Investors — Likewise, bond investors can see potential benefits as rates rise.
