Don’t be afraid to in­vest when rates are ris­ing

His­tory shows S&P in­dex often thrives

USA TODAY International Edition - - MONEY - Adam Shell

With a re­cent spike in bor­row­ing costs caus­ing swings in the mar­ket and angst on Wall Street, now might be a good time for in­vestors to con­sider re­jig­ger­ing their port­fo­lios and shift­ing to­ward in­vest­ments that fare bet­ter when in­ter­est rates are ris­ing. A mar­ket-mov­ing shift ap­pears to be un­der­way. The long pe­riod of his­tor­i­cally low rates in place since the 2008 fi­nan­cial cri­sis – which en­abled home­buy­ers to get cheap mort­gages, car shop­pers to ob­tain 0 per­cent loans and cor­po­ra­tions to grow their busi­nesses and prof­its with the help of cheap money – is re­vers­ing as in­vestors and the Fed­eral Re­serve, re­act­ing to an im­prov­ing U.S. econ­omy, push bor­row­ing costs back to­ward more nor­mal lev­els. The Fed has hiked short-term rates three times this year, rais­ing its key rate – which it slashed to zero in 2008 – to a range of 2 per­cent to 2.25 per­cent. Adding to in­vestors’ con­cern is the re­cent rise in the yield on the 10year Trea­sury note to above 3.25 per­cent, a seven-year high. In­vestors fear that higher rates will slow the econ­omy and dent cor­po­rate prof­its. Those po­ten­tial ob­sta­cles have caused in­creased mar­ket volatil­ity on Wall Street in the past three trad­ing ses­sions, with the Dow Jones in­dus­trial tum­bling more than 340 points. It has also changed the out­look for many types of in­vest­ments, rang­ing from stocks to bonds to real es­tate. As a re­sult, “port­fo­lios need to shift” to re­spond to the chang­ing risk and re­ward pro­file of dif­fer­ent in­vest­ments, Michael Wil­son, eq­uity strate­gist at Mor­gan Stan­ley, wrote in a re­search re­port. De­spite con­ven­tional think­ing that ris­ing rates are bad for stocks, his­tor­i­cal data show that the broad Stan­dard & Poor’s 500 stock in­dex has ac­tu­ally posted strong re­turns. Stocks moved higher in 12 of the 15 pe­ri­ods since 1950 when the 10-year Trea­sury yield was ris­ing, or 80 per­cent of the time, ac­cord­ing to data from SunTrust Ad­vi­sory Ser­vices. In fact, the S&P 500 posted av­er­age an­nu­al­ized re­turns of 12.6 per­cent dur­ing those 15 pe­ri­ods. Try­ing to pin­point how high the yield on the 10-year note must climb be­fore it be­comes a ma­jor hin­drance for the stock mar­ket is tough to de­ci­pher. Credit Suisse’s chief U.S. eq­uity strate­gist Jonathan Golub cites 3.5 per­cent as a thresh­old to watch, while Lind­sey Bell of Wall Street re­search firm CFRA cites 4 per­cent, and Bank of Amer­ica Mer­rill Lynch says it would have to jump to 5 per­cent be­fore bonds would look more at­trac­tive than stocks. The best com­pa­nies whose stocks you should own when bor­row­ing costs are ris­ing are those with­out a lot of debt and plenty of cash on hand, says Brian Bel­ski, chief in­vest­ment strate­gist at BMO Cap­i­tal Mar­kets. His firm cited a list of stocks that fit this pro­file, in­clud­ing A.O. Smith, which makes wa­ter heaters, video game maker Elec­tronic Arts, health in­surer Hu­mana and semi­con­duc­tor gi­ant In­tel. Banks are also viewed as a good place to park cash when rates are ris­ing, ac­cord­ing to Bel­ski. The parts of the mar­ket that nor­mally feel the most pain when rates are ris­ing are those in­vestors seek out for in­come and which pay out siz­able div­i­dends, such as util­i­ties, real es­tate and tele­com, McMil­lan says. Ris­ing in­ter­est rates also mean more ex­pen­sive mort­gages, which crimps af­ford­abil­ity for prospec­tive home­buy­ers. And if fewer peo­ple can af­ford homes, that could cause real es­tate prices to stag­nate or fall, crimp­ing the buildup in eq­uity of cur­rent home­own­ers, an­a­lysts say.

BRYAN R. SMITH/AFP/GETTY IM­AGES

Wall Street in­vestors fear that higher rates will slow the econ­omy and dent cor­po­rate prof­its.

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