What Stocks Do Well When Interest Rates Rise?

The Federal Reserve has raised interest rates for the first time since 2018 to curb the rising inflation. Even though it’s just a 25 basis points hike, the Fed prepares to raise rates six more times this year. As a result, investors are preparing for what could be a rocky road ahead. Stocks have already been on a tear in recent months, but investors still believe that the stock market is the best place to put their money when rates go up. So if you plan to keep your money in the market, keep reading as I’ll reveal to you the sectors and stocks that do well when interest rise. 

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How rising interest rates affect stocks

Rising interest rates are beneficial to the stock market but only to a certain extent. That’s because rising rates are a signal that the economy is booming. However, a growing economy is often followed by inflation concerns, which force the Federal Reserve to intervene by raising interest rates, thus slowing down the economy. 

When the economy is booming, companies report high revenues, which increases stock prices. On the other hand, when the economy slows down due to higher interest rates, consumers tend to spend less, meaning businesses report declining revenues and, therefore, stock prices fall. 

Even though stocks seem to perform poorly during rising interest rates, some sectors and stocks still outperform the market during these times. Savvy investors know how to pick such winning stocks, and it starts with understanding the following factors:

Factors to consider when investing during rising interest rates

Steady returns under any market conditions: There are goods and services that people need come rain or sunshine. For example, people will still buy food, beverages, hygiene products, and prescription drugs no matter how tumultuous the economy gets. As a result, they’re often considered safe havens during a recession. 

High dividend income: When interest rates are rising, and there are fears of an impending recession, fixed income becomes more important than ever. So it’s a good idea to look out for stocks that pay solid dividends and have the capability to continue paying them over the long term. 

Favor low-risk stocks: During periods of high-interest rates, investors find that they can get high returns from safer assets (like bonds), and so they sell out of their high-risk stocks, bringing down stock prices. As a savvy investor, you should avoid high-risk stocks in favor of low-risk stable stocks whose assured returns and dividends provide a safety cushion.

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Sectors and stocks that do well when interest rates rise

Considering the factors mentioned above, here are the sectors and the corresponding stocks that do well when interest rates rise. The list includes the finance sector, consumer staples sector, and healthcare sector.

Finance sector

When interest rates begin to climb, financial institutions such as banks, insurance companies, and brokerage firms usually see their profit margins grow.

1. Bank stocks

Banks tend to perform exceptionally well during rising interest rates because they charge higher interest on both new loans and existing adjustable-rate loans. On top of the list of bank stocks to consider are:

• JP Morgan Chase(JPM)
• Goldman Sachs (GS)
• Visa Inc (V)
• Bank of America (BAC)
• Citigroup (C)

2. Insurance stocks

Insurance companies, mainly life insurance companies, are sensitive to any changes in interest rates. This is due to the way these businesses invest their customers’ money. When someone buys insurance, their money is invested in long-term fixed-income products, along with everyone else’s.

The difference between what the company owes the policyholder and what it can make in the bond market is how insurance firms make money. So, naturally, the company makes more money off that spread when interest rates are high. Insurance stocks to consider are:

• MetLife (MET)
• Markel (MKL)

3. Brokerage stocks

As interest rates increase, brokerage firms tend to see a corresponding increase in profits. This is largely due to the fact that they are able to earn more money on the money they have invested. 

In addition, as rates rise, more people are likely to invest in treasury bond ETFs and value stocks, giving brokerage firms an even larger pool of potential customers. Thus, it is clear that brokerage firms benefit significantly from rising interest rates. Examples of brokerage stocks to consider buying are: 

• Blackrock (BLK)
• Ally Financial (ALLY)
• TD Ameritrade (AMTD)

Consumer Staples

The consumer staples sector is made up of businesses that manufacture and sell things that are regarded to be necessities for everyday life. Goods such as food, beverages, household, and hygiene products are examples of consumer staples. People will buy these essential items in both good times and bad times, making stocks in the consumer staples sector strong performers regardless of the broader economy. That’s why, during an economic downturn, they’re frequently regarded as defensive safe-havens. 

That’s why the consumer staples stocks are considered stable and robust performers regardless of the broader economy. 

4. Food and beverage stocks

You can always count on people buying food and beverages no matter what. Even during a recession, people will still need to eat. Therefore, food and beverage stocks are highly resilient and are good options for rising interest rate environments.

Examples of food and beverage stocks to consider are:

• Tyson Foods (TSN)
• Chipotle Mexican Grill (CMG)
• Conagra Brands (CAG)
• Mondelez (MDLZ)
• Coca-Cola (KO)
• Proctor & Gamble (PG)

5. Retail stocks

These businesses own and operate retail stores, wholesale stores, and e-commerce websites—essentially, any location where consumer basics are sold. Here are some retail stocks to consider:

• Costco (COST)
• Target (TGT)
• Walmart (WMT)

6. Household & personal products stocks

Household and personal care companies pay consistent dividends and have low stock price volatility. These stocks may be excellent picks for you if you’re seeking defensive consumer staples stocks that can produce strong long-term growth. Here are some examples to consider:

• Church & Dwight (CHD)
• Clorox (CLX)
• Estée Lauder (EL)
• L’Oreal (LRLCY)

Healthcare stocks

In addition to the consumer staples industry, here’s another sector that is indispensable regardless of the economic situation. Even during a recession, people will still need to buy their medicines or visit a doctor. Therefore, healthcare stocks and ETFs may be suitable investments because they may be able to withstand the storm if a recession occurs.

7. Pharmaceuticals

Pharmaceutical businesses produce and manufacture drugs to treat and prevent illnesses and infections. Examples of pharmaceutical stocks include:

• AbbVie (ABBV)
• Novartis (NVS)
• Merck (MRK)

8. Health Insurance Stocks

These businesses include firms that provide health insurance policies to help employers and individual customers cover the expense of healthcare. Here are stocks in the health insurance space to consider:

• UnitedHealth Group (UNH)
• Anthem (ANTM)
• Humana (HUM)

9. Healthcare service providers

Hospital operators, home health firms, managed care facility operators, and other healthcare service providers fall under this category. 

• HCA Healthcare Inc (HCA)
• Cigna Corp (CI)
• IQVIA (IQV)

Conclusion

In summary, the best stocks to buy during rising interest rates are in sectors that are indispensable come rain or sunshine. Sectors like consumer staples and healthcare will always be needed even if a recession ensues. The finance sector benefits from increasing its borrowing charges, thus increasing profits.  

What stocks do you think will benefit from rising interest rates? Let us know in the comments below.