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.
What should investors look for 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.
Finder survey: Which sectors would Canadians from different provinces consider buying stocks in?
Response
Saskatchewan
Prince Edward Island
Ontario
Nova Scotia
Newfoundland and Labrador
New Brunswick
Manitoba
British Columbia
Alberta
Financials
36.59%
23.27%
17.07%
20%
15%
17.07%
19.13%
22.54%
Information Technology
31.71%
50%
28.4%
21.95%
15%
25%
21.95%
24.04%
25.35%
Energy
29.27%
33.33%
31.36%
19.51%
40%
30%
26.83%
27.87%
32.39%
Health Care
26.83%
66.67%
25.64%
12.2%
30%
5%
21.95%
22.95%
21.83%
None of the above
21.95%
21.1%
29.27%
30%
35%
29.27%
15.3%
23.94%
Consumer Staples
19.51%
16.67%
12.03%
4.88%
25%
10%
4.88%
10.93%
10.56%
Real Estate
19.51%
30.97%
24.39%
25%
25%
31.71%
25.68%
33.8%
Utilities
19.51%
23.67%
24.39%
15%
10%
14.63%
22.4%
24.65%
Industrials
17.07%
16.67%
15.38%
10%
10%
12.2%
16.39%
18.31%
All of the above
9.76%
16.67%
15.19%
19.51%
15%
10%
14.63%
22.95%
15.49%
Materials
9.76%
16.67%
11.05%
7.32%
10%
5%
9.76%
11.48%
12.68%
Communication Services
7.32%
14.2%
14.63%
10%
5%
21.95%
15.3%
14.79%
Consumer Discretionary
4.88%
16.67%
5.92%
9.76%
5%
10%
2.44%
6.56%
7.04%
Source: Finder survey by Pollfish of 1001 Canadians, January 2024
More stock picks from the 4 sectors
Energy
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.
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.
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.
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.
Matt Miczulski is an investments editor at Finder. With over 450 bylines, Matt dissects and reviews brokers and investing platforms to expose perks and pain points, explores investment products and concepts and covers market news, making investing more accessible and helping readers to make informed financial decisions.
Before joining Finder in 2021, Matt covered everything from finance news and banking to debt and travel for FinanceBuzz. His expertise and analysis on investing and other financial topics has been featured on CBS, MSN, Best Company and Consolidated Credit, among others. Matt holds a BA in history from William Paterson University. See full bio
Matt's expertise
Matt has written 5 Finder guides across topics including:
A failed SPAC deal pulled the plug on this vertical farming company’s plans to go public. But you can buy stock in other sustainable farming companies.
How likely would you be to recommend Finder to a friend or colleague?
0
1
2
3
4
5
6
7
8
9
10
Very UnlikelyExtremely Likely
Required
Thank you for your feedback.
Our goal is to create the best possible product, and your thoughts, ideas and suggestions play a major role in helping us identify opportunities to improve.
Advertiser Disclosure
finder.com is an independent comparison platform and information service that aims to provide you with the tools you need to make better decisions. While we are independent, the offers that appear on this site are from companies from which finder.com receives compensation. We may receive compensation from our partners for placement of their products or services. We may also receive compensation if you click on certain links posted on our site. While compensation arrangements may affect the order, position or placement of product information, it doesn't influence our assessment of those products. Please don't interpret the order in which products appear on our Site as any endorsement or recommendation from us. finder.com compares a wide range of products, providers and services but we don't provide information on all available products, providers or services. Please appreciate that there may be other options available to you than the products, providers or services covered by our service.
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
