Whatâs Going On Here?Investors have been on the edge of their seats as they watch the US Federal Reserve (the Fed) for any sign of a rise in interest rates. What Does This Mean?The US has pumped huge sums of money into its economy throughout the pandemic. But now that a recoveryâs officially on the cards, investors are worried the influx of cash will send product prices higher, ultimately forcing the Fed to prematurely raise interest rates to keep this inflation in check.
That matters: stock market valuations are eye-watering in absolute terms, sure, but not when you compare them to record-low interest rates. Higher rates, then, will make safer investments like cash and new government bonds look more attractive, and riskier stocks look more expensive. So just the thought of rising rates has driven some investors to sell off both their priciest stocks and existing bonds last quarter â a trend thatâs set to continue throughout the year. Why Should I Care?For markets: Watch the Fed. The rest of the worldâs central banks take their cues from the Fed, which is why itâs so important to keep an eye on what itâs planning to do. Case in point: when the Fed said in March that it wasnât expecting to tweak interest rate policy despite the countryâs improving economic growth outlook, the European Central Bank and Bank of England were quick to reassure investors theyâre committed to low rates for the foreseeable future too.
For you personally: How to protect your portfolio from rising rates. There are three adjustments you can make to your portfolio to set it up for rate hikes, no matter when they happen. First, invest in cyclical and value stocks like industrials and banks, which are set to benefit from an improving economy and rising rates. Second, buy into commodities like copper, since their prices tend to rise alongside inflation. And third, back the US dollar, whose value should rise in line with rates. |