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These Sectors Benefit From Rising Interest Rates

These Sectors Benefit From Rising Interest Rates

Interest rates rise and fall as the economy moves through periods of growth and stagnation. The Federal Reserve is an important driver for rates because officials often lower rates when economic growth slows and raise them to cool the economy when inflation becomes a concern.

Increasing rates require careful attention when crafting an investment portfolio. An investor may bolster positions in short-term and medium-term bonds that are less sensitive to climbing rates or implement a bond ladder to maximize cash and debt returns.

An environment where interest rates rise amid signs of an improving economy can also offer opportunities for equity investors. Examining the sectors within the stock market that tend to benefit from higher rates in a healthy economy can help to find these opportunities.

Key Takeaways

  • Some sectors within the stock market are more sensitive to changes in interest rates than others.
  • Financials benefit from higher rates through increased profit margins.
  • Brokerages often see an uptick in trading activity when the economy improves and higher interest income from higher interest rates.
  • Industrials, consumer names, and retailers can also outperform when the economy improves and interest rates move higher.
  • Some sectors such as real estate can cool down during interest rate hikes.

The Interest Rate Environment

The COVID-19 pandemic had a pronounced, depressive effect on global financial markets but it wasn’t just the public that was worried. The deep uncertainty about economic activity led the Federal Reserve to slash 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 that it needed to raise rates to combat rampant inflation.

Fed Chair Jerome Powell made the announcement on March 16, 2022. This was the first increase in the federal funds rate since 2018. Many economists believed that the Fed would increase rates further to combat inflation which was above the target of 2%.

Raising interest rates leads to higher borrowing costs and this can lead to a slowdown of growth which in turn helps to control inflation.

Stocks to Watch When Rates Rise

You should always keep the state of the economy in mind when you’re creating or making changes to your portfolio. This includes times when the economy is improving and is healthy or when it’s overheated or inflationary.

There are certain stocks you may want to look at when interest rates rise, including:

Company  Ticker  Industry 
Bank of America  BAC  Financial (Banking) 
JPMorgan Chase JPM  Financial (Banking)
Goldman Sachs GS Financial (Investment Banking/Brokerages)
Citigroup C Financial (Banking)
Charles Schwab SCHW Financial (Investment Banking/Brokerages)
Allstate ALL Insurance
AmTrust Financial Services AFSIN Insurance
The Travelers Companies TRV Insurance
Whirlpool WHR Electronics/Appliances
Kohl’s KSS Retail (Department Stores)
Costco Wholesale COST Retail (Specialty Stores)
Home Depot HD Retail (Home Improvement)
Ingersoll-Rand IR Industrial (Machinery)
PACCAR PCAR Industrial (Trucking/Construction/Machinery)

Why do these companies perform well when interest rates increase? It all boils down to their industries.

Financials First

The financial sector has historically been among the most sensitive to changes in interest rates. Entities like banks, insurance companies, brokerage firms, and money managers with profit margins that expand as rates climb generally benefit from higher interest rates.

Central bank monetary policies and the Fed’s reserve ratio requirements also impact banking sector performance.

Banks

Rising rates can point to a strong economy. That usually means that borrowers have an easier time making loan payments and banks have fewer non-performing assets. It also means that banks can earn more from the spread between what they pay to savers for savings accounts and certificates of deposit (CDs) and what they can earn from highly-rated debt like Treasuries.

Banks that might benefit as rates rise include:

  • Bank of America which has a substantial presence throughout the U.S.
  • JPMorgan Chase with its robust operations in the U.S. and worldwide
  • Goldman Sachs Group with widespread investment banking and wealth management services
  • Citigroup which does business in nearly 180 countries 

Brokers

Brokers like Charles Schwab and Goldman Sachs, which is also part of the banking group, hold promise during times of escalating rates for similar reasons. A healthy economy sees more investment activity and brokerage firms may also benefit from increased interest income when rates move higher.

Insurers

Insurance stocks can flourish as rates rise because the relationship between interest rates and insurance companies is linear. The higher the rate, the greater the growth. Insurance providers such as Allstate, AmTrust Financial, and Travelers don’t fare as well in low-rate climates because their underlying bond investments yield weak returns.

Insurers with steady cash flows are compelled to hold a lot of safe debt to back the insurance policies they write. The economic health dividend also applies to insurers. Improving consumer sentiment means more car purchasing and improving home sales and this means more policy writing.

Beyond Financials

Financials aren’t the only potential star performers in a healthy rising-rate environment. Consumer discretionary stocks also can see a bump. Improving employment coupled with a healthier housing market makes consumers more likely to splurge on purchases outside of the realm of consumer staples like food, beverages, and hygiene goods.

Manufacturers and sellers of kitchen appliances, cars, clothes, hotels, restaurants, and movies also benefit from the economic health dividend. Companies to keep an eye on during interest rate increases include appliance maker Whirlpool Corp. and retailers Kohl’s Corp., Costco Wholesale Corp., and Home Depot, Inc.

The industrial sector also benefits from the economic health dividend that can be indicated by rising rates. Companies like Ingersoll-Rand PLC and manufacturers of heating, ventilation, and air conditioning systems tend to outperform as do companies like PACCAR, a maker of heavy-duty trucks and truck parts. Such companies can be among the first to benefit from any increase in housing starts.

Have Interest Rates Risen Since the COVID-19 Pandemic?

Rate hikes began to rise in 2022. The Fed announced on March 16 of that year that it had raised its target for the federal funds rate to a range of 0.25% to 0.50%. This was the first time the Fed hiked the rate since 2018. The Fed has since raised the Fed funds rate beyond that as it combats inflation. The Fed’s target range was 4.75% to 5.0% as of Sept. 18, 2024.

What Are the Best Stocks to Buy When Interest Rates Are Set to Rise?

There are two schools of thought when considering which stocks to buy before a rise in interest rates. Those who want to take advantage of the environment could consider stocks in the relevant sectors listed in this article. Investors could alternatively set themselves up in a defensive position. They could invest in consumer staples, healthcare, and possibly physical assets like gold and precious metals ETFs in this case.

Is the Financial Sector the Best to Buy When Rates Are Rising?

Financials tend to perform strongly in a rising interest rate environment although it depends on the health of the overall market. Investors could see solid returns in defensive sectors as investors look to allocate their gains in sectors that are generally considered stable during market downturns.

The Bottom Line

You’ve adjusted your fixed-income portfolio to account for rising rates. You might also consider adjusting your equity investments to favor companies that may benefit from accompanying rising rates in a strengthening economic environment. An excellent place to start is the financial sector. Consider manufacturers of durable goods, retailers, travel-related stocks, and the industrial sector as consumer confidence picks up and housing follows suit.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read our warranty and liability disclaimer for more info.

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