There has been a lot of coverage in the news recently about the Fed’s decision to raise interest rates. With the recent history of record-low rates, it may be difficult to remember that periods of rising rates are normal. In fact, rising rates can create opportunities for investors. So how can you take advantage of the current interest rate climate?
1. Buy Stocks.
Since 1970, there have been 21 periods where the 10-year rate moved a whole percentage point. The S&P 500 had a positive return for 15 of those 21 periods.
Yes, every market is unique, and every spike in interest rates can be due to a wide range of influences. Generally speaking, however, increasing rates will cause investors to sell bonds and buy stocks. Bond prices move inversely with interest rates, so as rates go up, prices come down. Long periods of low rates indicate high relative prices for bonds. When prices start to come down, investors look for more attractive investments. The increase in demand raises stock prices.
2. Rebalance Your Portfolio.
Interest rates affect an organization’s ability to borrow and pay back debt. Low rates improve the ability to pay back loans, so companies borrow more. The increased funds create more spending, which drives corporate development. When rates go up, the concern is that companies will be less likely to borrow. This concern affects pricing within the market.
When market prices are impacted from Fed activity, the movements are typically erratic. The reason for this is that changes in interest rates can create uncertainty, which leads to volatility. The more volatile a market, the more opportunities there are for an investor to buy low and sell high. Active investors can benefit from buying during down swings and selling during peaks.
3. Diversify Your Bonds.
Corporate Bonds – Higher rates are not necessarily bad for companies. An increase in value of a company’s equity (which we’ve seen in times of rising rates) improves a company’s credit quality. This positively affects the value of the company’s debt. Corporate bonds are impacted much more by the company’s financials than external factors.
Short-Term Bonds – Changing interest rates can create opportunities in bonds with different maturities. Shorter duration bonds are typically less sensitive to changes in interest rates. This is primarily because there is less exposure to the long-term effects from Fed activity. A strategy that uses short-term fixed income gives investors the ability to capitalize on rate movements. When these bonds mature, the principal can be reinvested at the higher rates.
Global Bonds – Foreign bonds can be a great way to diversify your U.S. investments. Interest rates in each nation are driven by different factors. By taking a look at the entire global landscape, investors can uncover other opportunities within the bond market. At the same time, investors who diversify can avoid the potential impact of a continuing
rise in U.S. rates.
This is a guest post by Kyle Brennan. Kyle is a financial author, specializing in SEO and copywriting services for investment advisors. He received his MBA and MS from Creighton University and is a Level III Candidate with the CFA Institute. If you’d like to contact him, please e-mail kylembrennan@gmail.com.
To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.
