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Rising interest rates can signal a dip in the stock market as more people turn to savings instead of stocks to grow their wealth and companies churn out less profit due to paying higher interest on debt. But which sectors and stocks do well when rates are on the rise? Here are the stocks you should keep an eye on during rate hikes.
Not all sectors will perform well when interest rates are rising, so investors shouldn’t expect broad equity market returns.
Investing during periods of rising interest rates can be successfully done by shifting toward companies and sectors that tend to do well in the higher rates environment, such as energy, financials, real estate and consumer staples.
Companies that have a large cash balance and a track record of consistent dividend payouts tend to perform well during rising interest rates. High dividend stocks in the US outperformed the S&P 500 in 7 out of the 10 rising interest rate periods that occurred since 1960, according to data from Global X Management Company.
Here are 4 sectors and stocks that may be worth watching when rates are heading up.
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The energy sector has historically been the best performing sector leading up to a peak in inflation, according to data from Refinitiv.
In fact, the energy sector was the best-performing sector in the S&P 500 in 2021. According to financial information and analytics company S&P Global, energy was the only sector that didn’t post a loss in January 2022.
Underproduction in the energy sector can drive up prices. When crude oil prices rise, oil stock prices tend to follow, because a portion of oil companies’ earnings comes from the amount of oil that is sold.
Check out our guides on the best oil stocks in Canada and the United States for more information on stocks to watch.
Devon Energy Corporation is an independent energy company that primarily engages in the exploration, development and production of oil, natural gas and natural gas liquids in the United States.
Halliburton Company provides energy products and services around the world. It assist customers with hydrocarbons location, geological data management, drilling and formation evaluation, constructing and completing wells and optimizing products throughout the life of customers’ assets.
Financial stocks generally benefit from a strong economy and higher rates. For banks, higher interest rates mean more money paid out to customers who have savings accounts. But it also means even more profit in the form of interest paid on loans and other debt instruments. Check out the best Canadian bank stocks here.
Similarly, brokerage firms earn money from the interest earned on cash balances held in client accounts and from lending client money elsewhere.
Insurance companies make a profit off the spread between what it owes policyholders versus what it can make with its investments. Insurance companies invest a portion of premiums in the bond market, and when rates are high, it makes more money off that spread.
All this means that the financial sector, which was among the market’s top-performing sectors in 2021, may see growth amid rising rates. That being said, some data suggests that financials may underperform in the year leading up to a peak in inflation.
Upstart Holdings, Inc. is a cloud-based artificial intelligence (AI) lending platform based in the United States. Its platform aggregates consumer demand for loans and connects it to its network of the company’s AI-enabled bank partners.
Wells Fargo & Company is a diversified financial services company that provides banking, investment, mortgage and consumer and commercial finance products and services in the United States and internationally. It operates through 4 segments: Consumer Banking and Lending, Corporate and Investment Banking, Commercial Banking and Wealth and Investment Management.
Even though rising interest rates can increase borrowing costs for real estate investment trusts (REITs), REITs can benefit from rate hikes because it typically increases real estate owners’ ability to raise rental prices and pass that income on to shareholders.
Behind energy, real estate was the market’s second-best performing sector in 2021. According to investment management firm Cohen & Steers, REITs over the last 3 decades have had a 10.8% annualized return in periods of rising rates and positive economic growth.
Upstart Holdings, Inc. is a cloud-based artificial intelligence (AI) lending platform based in the United States. Its platform aggregates consumer demand for loans and connects it to its network of the company’s AI-enabled bank partners.
Bluerock Residential Growth REIT focuses on developing and acquiring a diversified portfolio of institutional-quality highly amenitized live/work/play apartment communities in demographically attractive knowledge economy growth markets. The Company is included in the Russell 2000 and Russell 3000 indices.
When interest rates go up, people may be more attracted to saving than spending. Rising costs can cause people to think twice about splurging on big ticket items. But people still need to spend on staples like food, beverages and hygiene products.
Companies that sell these items also battle rising inflationary costs but can usually pass on such costs to consumers.
A recent report from investment management company Hartford Funds shows that, along with energy, equity REITs and financials, the consumer staples sector has outperformed every other sector during periods of rising inflation between 1973 and 2021.
As interest rates go up to battle rising costs, consider investing in stocks that have higher pricing power, as they are able to increase their prices with inflation better than some other industries.
Investing in consumer staples stocks
Tyson Foods, Inc. is a global food company that operates through 4 segments: Beef, Pork, Chicken and Prepared Foods. It sells products to grocery retailers and wholesalers, meat distributors, warehouse club stores, industrial food processing companies, chain restaurants, live markets, international export companies and domestic distributors.
The Coca-Cola Company is a beverage company that manufactures, markets and sells various nonalcoholic beverages worldwide. It operates through a network of independent bottling partners, distributors, wholesalers and retailers as well as through bottling and distribution operators.
At the time of publication, Matt Miczulski owned shares of WFC and HAL.
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