10 Best Investments During High Interest Rates

Hamna Asim
10 min read

In This Article:

In this article, we discuss 10 best investments during high interest rates. If you want to skip our detailed discussion on the stock market outlook and industries benefiting the most due to high interest rates, head directly to 5 Best Investments During High Interest Rates.

According to J.P. Morgan's analysis last year, as mentioned by Forbes, starting from February 2009, there was a strong correlation between the movements of the S&P 500 and the 10-year Treasury bond yield until the 10-year yield reached 3.5%, at which point they began to diverge. In simpler terms, increasing interest rates can benefit the overall stock market up to a certain threshold. Rising interest rates have several implications for financial markets. They tend to put pressure on stock valuations, impacting corporate profits and growth prospects, especially for growth stocks. Dividend-paying stocks may need to increase yields to compete with potentially higher bond coupon rates. However, financials, particularly banks and lending institutions, historically perform well in rising rate environments as they can earn more on loans.

"As the Federal Reserve increases interest rates, we can anticipate a deceleration in economic growth," Eric Freedman, Chief Investment Officer, U.S. Bank Wealth and Institutional Asset Management, commented in July 2023. Indeed, the Gross Domestic Product (GDP) expanded at a notably slower rate in 2022, registering a 2.1% growth compared to the 5.9% seen in 2021. In the first quarter of 2023, the economy seemed to stabilize, achieving a 2.0% annualized growth rate. Hiked interest rates have also altered the landscape for equity investors, leading to potential impacts on future earnings growth for U.S. companies. Economic weakness, resulting in slower GDP growth, can affect corporate earnings and stock prices. Additionally, the attractiveness of bonds and other fixed income investments increases with higher interest rates, potentially reducing demand for stocks. Stocks with premium price-to-earnings (P/E) multiples, particularly those with future earnings expectations that may not materialize, face risks in this changing environment. Higher debt costs due to elevated interest rates could also impact corporate profits and stock prices. While the Federal Reserve has signaled more rate hikes to come, the outlook for equities remains uncertain, with factors like corporate performance and inflation influencing market dynamics and potential volatility ahead.

It's not only financial companies that can thrive in a favorable rising interest rate environment. Consumer discretionary stocks can also experience a boost, as improved employment and a healthier housing market tend to encourage consumers to indulge in non-essential purchases beyond basic staples like food, beverages, and hygiene products. According to CNBC, in July 2022, the United States' inflation rate, assessed through the Consumer Price Index, stood at 8.5%. Although the impact of inflation varied across different goods and services, categories like food and energy witnessed the most significant price increases. Some noteworthy companies to watch during interest rate hikes include Bank of America Corporation (NYSE:BAC), in the banking and finance sector, as well as consumer goods retailers such as Walmart Inc. (NYSE:WMT).

Recommended Stories