Market Insights & News

14 days ago

High Interest Rate Investing (BBAE’s latest Forbes piece)

High interest rates after low interest rates do weird things to markets. Here are which stocks, sectors and investments may benefit.

By James Early, BBAE CIO

Spoiler alert: I wrote a recent article for Forbes about investing in a high interest rate environment. You can read it here (and remember, if you haven’t already, please take a moment to subscribe to this blog and/or follow BBAE on Forbes – just click on the button next to the title on Forbes).

But the punchline wasn’t really about investing in high rates. I mean, it was in a way – I showed how Fed Funds have risen:

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And then I talked about how prices of old bonds get killed when new bonds pay more – and vice versa (the US has had roughly a 40-year run of old bonds benefitting from this phenomenon):

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But there was more.

Stocks are a different beast. Generally, over a period of time, they mostly get dinged by higher rates, as some academic evidence I cite shows.

But the near-term results are a mixed bag. This may be because the market has already anticipated rising rates, because the rising rates come when economies are hot, and that hotness trumps the rate-hike effect, because the Fed Funds rate (the rate that’s actually hiked) doesn’t map to other rates as tightly as expected sometimes, or for some other reason.

Anyway, I walked through the conventional wisdom regarding “good” and “bad” sectors during rising rates.

But the real question is this: Should investors be readying for rising rates now, now that Fed Funds may have peaked, or should they be looking to the FOMC’s own Fed Funds forecast – which anticipates declining rates starting next year – and be preparing to invest in a falling interest rate environment, versus a just plain “high” one?

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p.s. Whether you’re investing for high rates, falling rates – or if you don’t even care about interest rates when you invest – we’re confident that you’ll find BBAE’s butter-smooth app (did I mention it was smooth as butter?), helpful-but-not-cluttered tools and resources, and commission-free trading a true asset. Click here to explore an account.

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