Introduction

What kind of investments should one make when rates are expected to increase? Timing the market is difficult in general. But there are steps you can take to ensure you're putting your money into the most significant stock funds and industries even when interest rates rise. It could be prudent to save for a time when interest rates are higher, even if they are now at or near record lows. This is often followed by the stock market's final upward movement before a decline. An economic cycle may be ending even though interest rates are climbing. You may strike a healthy balance by investing during rising interest rates, but you should also be ready for more challenging times. In this guide, we will discuss the best stocks and sectors for rising interest rates.

The Current Interest Rate Environment

The COVID-19 pandemic has significantly impacted the worldwide financial markets. The public was not the only one concerned; the Federal Reserve Board also felt a great deal of unease, and as a result, they lowered the federal funds rate from 0.25% to 0%. Until March of 2022, when the Fed realized they had to raise rates to confront runaway inflation, they remained at this level. On March 16, 2022, Federal Reserve Board Chairman Jerome Powell made the announcement. There hasn't been a hike in the federal funds rate since 2018. Because inflation has risen above the Fed's 2% objective, many economists expect future rate hikes. Rising interest rates make borrowing money more expensive, which may reduce economic activity and inflation.

Best Stock Funds for Rising Interest Rates

Knowing which types of mutual funds will still be profitable for you to invest in, even if rates are rising, is essential. Growth stock funds are one example. Growth companies, defined as those with high expected growth and high return on equity, are the primary focus of these mutual funds. Growth stocks are best bought during a healthy economic expansion, often in a business cycle's later (mature) stages. Generally speaking, interest rates tend to rise during periods of high economic growth. The investment strategy of momentum uses this phenomenon to its advantage. In 2007, for instance, the economy was booming, and nearly all market indices were at record highs1. Large-cap, mid-cap, and small-cap stocks were no exception; growth stocks were the norm then. It is important to remember that the Great Recession of 2008 marked the end of the cycle.

Best Stock Sectors for Rising Interest Rates

In most cases, rising interest rates indicate that the economy is about to reach its peak performance. For this reason, the Federal Reserve boosts interest rates when the economy shows signs of growing too quickly. As a result, inflation is a problem that needs to be addressed. The Fed will likely boost interest rates when inflation becomes a problem. Those trying to time the market with sectors will probably be looking to profit from a rise in value. Also, they should prepare for steeper losses if and when the market falls south. You may protect your portfolio by investing in the following safe stock markets:

Non-Cyclical Investments In Consumer Staples

When the economy is strong, and interest rates are just beginning to rise, consumer discretionary (cyclical) stocks tend to do well. However, it is difficult to predict when a recession will occur. Thus non-cyclical or defensive stocks are preferable. Even in challenging economic times, necessities like shelter, food, heating, cooling, schooling, and clothing remain in high demand.

Health Care

Medicine and doctor visits must be paid for regardless of the economic climate. Mutual funds and exchange-traded funds (ETFs) focused on the healthcare industry could be a wise investment if interest rates continue to rise since they can weather a recession.

Gold

Investors anticipating a sluggish economy often shift their capital into real estate and other hard asset funds. Gold mutual funds and exchange-traded funds (ETFs) are possible examples of such investments. Gold isn't a business segment, but it is an asset that has the potential to grow in value during market declines and periods of high uncertainty. Gold, however, may be equally as volatile as other investments, so don't let its historical success impact your investment decisions.

Conclusion

It would help if you still exercised caution even when you want to make wise purchases. Remember that trying to time the market is not an intelligent strategy. You can still apply some of these strategies when building your portfolio. The rising interest rates have prompted you to change your fixed-income investments. Companies that reap the benefits of a healthy economy with rising interest rates are where your equity investments should be focused. The financial industry is, once again, a great starting point. Then, as consumer confidence increases and the housing market recovers, think about investing in retailers, travel-related stocks, and industrials.