Investing in equities in a rising interest rate environment has provided investors with newfound complexities, making deciding between investments more difficult than in the past.
As monetary policy tightens, investing in securities which rely on low interest rates has become more of a gamble, with such securities seeing declines coming from expected underperformance over the medium term, given the fact high-yielding equities are often cited as bond substitutes.
In June, the Fed raised rates as expected, bringing the upper limit of the central bank’s guidance to the 2% level. Recent GDP numbers show the United States economy is now growing at an impressive clip of more than 4%, a feat which has not taken place since prior to the last economic downturn.
Renewed exuberance surrounding growth prospects over the medium term, particularly in the United States, have led to increased expectations that the Fed will raise rates again this year, and perhaps twice by year end. Such moves would provide continued downward pressure on utilities, REITs and other interest-oriented stocks, making these sectors areas I would avoid for the time being.
The prospect of additional rate hikes have also led to speculation that the yield curve (the 10-year treasury bond yield minus the two-year treasury bond yield) could invert, signaling yet another recession. While this has not yet taken place, investors and economists will be keeping a close eye on what the Fed decides to do moving forward.
Invest wisely, my friends.
