The Fed just raised rates by a quarter point.
Along with the hike, the central bank is penciling in another six rate hikes this year, bringing us to about 1.75% to 2%. For 2023, we could see another three hikes, with no hikes in 2024.
“In a statement following its two-day meeting, the Fed hinted at rising concern about inflationary pressures. It said inflation has been high due to ‘broader price pressures’ and added that the war in Ukraine and ‘related events are likely to create additional upward pressure on inflation,’” as quoted by The Wall Street Journal.
With rates on the rise, where should we invest?
One of the top sectors to keep an eye on are financials.
That’s because the sector is among the most sensitive to changes in interest rates. When rates climb, margins expand, which is good for banks, brokerage firms, and money managers.
Look at Bank of America for example.
“Analysts are bullish on shares because among the big banks Bank of America is one of the most sensitive to interest-rate hikes. With it widely expected that the Fed will raise interest rates at least three times this year, Bank of America would be poised to benefit more than peers,” as noted by Barron’s.
Another great way to trade financials is with an ETF, such as the Financial Select Sector SPDR Fund (XLF). With an expense ratio of 0.10%, the ETF offers exposure to Berkshire Hathaway, JP Morgan, Bank of America, Wells Fargo, Morgan Stanley, and Goldman Sachs, for example.
Or, keep an eye on consumer discretionary stocks.
Automakers, homebuilders, retailers, and cruise lines for example can benefit from higher interest rates.
“The early part of a rate hike cycle should be beneficial to the consumer discretionary sector. Higher rates are presumably the result of a pickup in economic growth that is flowing from higher levels of employment, which creates a stronger sense of job security, higher wage growth and increased lending activity, and that leads to higher levels of spending,” says Pat O’Hare, chief market analyst at Briefing.com, as quoted by US News and World Report.
It would explain why Royal Caribbean jumped after the Fed announcement, as did Carnival.
Moving forward, we’ll discuss even more stocks that could benefit from rising rates.