Customer Service 1 (888) 261-2693
Please enter Search keyword. Advanced Search

What the Coming Interest-Rate Hike Means for Your Investments

By Dr. Steve Sjuggerud
Tuesday, May 24, 2016

The Federal Reserve is promising us that it will hike interest rates this year... possibly as soon as next month.
The question is... how bad will a rate hike be for your investments?
The short answer is, you don't have anything to worry about. The longer answer is, we have an opportunity here.
Let me explain...
Most people assume that the Fed raising interest rates is bad for things like stock prices and house prices. You can see why people would think that... Higher borrowing costs would cut into your profits.
That line of thinking makes sense. But the truth is different from what people assume...
Based on history, asset prices (like stocks and real estate) have actually outperformed when the Fed is raising interest rates. I showed the shocking numbers here in DailyWealth not too long ago.
So why would asset prices go against the conventional wisdom and outperform AFTER the Fed starts raising interest rates? And why does the opposite happen as well – why do assets underperform when the Fed starts cutting rates?
Here's why: Often when the Fed starts cutting interest rates, it's trying to stave off a panic in the markets – so asset prices are going down during the panic.
On the flip side, when the Fed starts raising interest rates, it's a signal to the markets that the panic is over and the economy is doing just fine.
So we know that stocks, housing, and gold do well when the Fed is raising interest rates... But what about emerging market stocks?
I ask this question for two reasons:
1.   Emerging market countries are supposed to be the most sensitive markets to interest-rate hikes, and
2.   I am particularly interested in emerging market stocks these days, because they're so cheap.

Looking at three decades of data, the shocking conclusion is that when the Fed is hiking interest rates, emerging markets actually perform well...
The easiest way to see it is, well, to see it:

We've gone through four "rising rate" cycles in the last 30 years.
Three of those times, emerging market stocks simply ignored the rate hikes and powered higher. (The other time, from 1994 to 1995, emerging market stocks went down.)
Here's the impressive part: The compound annual returns on emerging market stocks during rising-rate environments actually beats their "buy and hold" compound annual returns. In other words, emerging markets go up more when the Fed is rising rates than when it isn't.
Granted, we're only looking at four occurrences. But this gives me enough confidence not to worry much about rate hikes...
The Fed will likely raise interest rates sometime soon... but we aren't worried. We know that stocks, real estate, gold, and emerging markets have a history of outperformance when the Fed is raising rates.
Don't worry about rate hikes. Take advantage of them through these assets.
Good investing,

Further Reading:

"Most folks simply assume that the Fed raising interest rates is a bad thing for stock prices and for house prices," Steve writes. "Don't fall for this myth. It's simply not true." Learn more here.
"If gold were truly affected by the Fed raising interest rates, then you would think that the dramatic move we saw from 2004 to 2006 would have a devastating effect on the gold price... right?" See why higher interest rates are actually good news for gold here: Here's What Will Happen to Gold If the Fed Raises Interest Rates.

Market Notes


Today, a bit of kudos for our resource expert Matt Badiali...
In January, Matt returned from a trip to Abilene, Texas to see how low oil prices were affecting the oil-rich Permian Basin. He described seeing a "graveyard of inactive oil-drilling rigs"... and suggested that Vancouver-based auction house Ritchie Bros. Auctioneers (RBA) would stand to benefit from the uptick in used-equipment sales.
Ritchie is a global leader in its industry. The company has grown from less than $100 million in gross auction proceeds in 1980 to around $4.3 billion in 2015. In short, when oil prices rise, so does demand for used equipment. And that means bigger sales and more profits for companies like Ritchie Bros.
As you can see from the following chart, not only was Matt's call spot-on... but his timing was, too. Since publishing the essay on January 15, RBA shares are up more than 45%, recently hitting their highest level in more than seven years...

premium teaser

Recent Articles