What Stocks Go Up When Rates Rise?

Maybe you have already felt it in your pocket already, interest rates are on their way back up. While this is bad news for people looking to purchase homes and who invest in high growth stocks, there are some investors who may benefit. That’s because when interest rates start to rise amid signs that the economy is improving, new opportunities arise. 

With interest rates expected to rise as many as seven times this year to 2 or 3% by the end of 2022, it’s a good time to examine what sectors of the stock market benefit when rates rise and start considering whether or not you should invest in them.

Financial Stocks

Historically, the financial sector has been one of the most sensitive sectors to interest rate changes. Entities like banks and insurance companies typically benefit from higher interest rates because their profit margins actually expand as rates climb.

In general, rising rates signify an economy that is gaining strength. A strong economy means borrowers have an easier time making their loan payments, and banks have fewer non-performing assets.

Banks can also earn more from the spread between their outgoing funds — so savings accounts and CDs — and their earnings. Simply put, banks make more money as interest rates rise because they enjoy a higher net interest margin.

Banks also make a lot of money from net-interest income — profits that are generated from interest-bearing assets. As interest rates rise, the interest-bearing assets produce more money, and the banks generate more profit. We’re not talking about a few hundred dollars either. In the fourth quarter of 2021, JPMorgan Chase reported its net interest income at $13.7 billion.

Banks that are looking to benefit the most as interest rates rise include:

  • Bank of America (BAC)
  • JPMorgan Chase (JPM)
  • Goldman Sachs (GS)
  • Citigroup (C)
  • Capital One Financial Corp (COF)

When it comes to brokers, E*TRADE, Charles Schwab, and TD Ameritrade all stand to benefit largely because health economies see more investment activity. Brokerage firms also benefit from increased interest income as the rates increase.

Insurance is another sector where stocks can flourish with rising rates. In fact, the relationship between insurance companies and interest rates is actually linear — the higher the rate, the bigger the growth. That also means that these providers, like Allstate (ALL), don’t fare as well when interest rates dip because their underlying bond investments produce returns that are weak.

Industrial Stocks

The industrial sector is another that reaps major benefits from spiking interest rates. Companies that manufacture heating, ventilation, and air condition systems (HVAC) generally outperform.

So do companies like heavy-duty trucks and part-maker PACCAR. These companies are generally the first to benefit from increases in housing starts (new construction projects), as do companies that supply machinery and equipment such as forklifts, tools, thermostats, pumps, and other hardware.

Companies that provide services, including transportation (rail, air, trucking), also benefit during rate hikes. In general, industrial stocks are mostly cyclical, which means they benefit from stronger economic cycles.

Retail traders commonly overlook industrials because they seem less exciting than tech stocks or cryptocurrency but they can help investors stay on pace with the rising tide of the growing economy.

Some industrial stocks to know and watch include:

  • Caterpillar (CAT)
  • John Deere and Company (DE)
  • Boeing (BA)
  • Honeywell (HON)
  • General Electric (GE)
  • Union Pacific (UNP)
  • Louisiana-Pacific Corp (LPX)
  • Raytheon Technologies (RTX)
  • UPS (UPS)
  • FedEx (FDX)

In early February of 2022, technology stocks continued their downward trajectory after a brutal start to the year. On February 1st, Apple fell 1.1%, and Microsoft fell 1.3% as the tech sector remains sensitive to concerns about the interest rate hikes.

At the same time, industrial stocks are making solid gains — led by a 12.3% surge in UPS after the carrier reported much better results than analysts anticipated. UPS rival FedEx rose 4%.

Consumer Discretionary Stocks

Consumer discretionary stocks also see a bump as rates rise thanks to the combination of improving employment and a healthier housing market that makes customers much more likely to splurge on purchases outside of the everyday consumer staples realm (food, personal hygiene items, utility bills, etc.)

This means that companies that manufacture and sell things like kitchen appliances, cars, clothing, hotels, restaurants, and movies also reap the benefits of a healthy economy. 

Companies you should keep your eye on during the interest rate increase include:

  • Whirlpool (WHR)
  • Kohl’s (KSS)
  • Costco (COST)
  • Home Depot (HD)
  • General Motors (GM)
  • Ford (F)
  • Nike (NKE)

Consumer staples also perform well during interest rate increases, typically performing best during peak times of the economic cycle and the beginning stages of rising interest rates.

But, these stocks are more suitable right before a recession hits — although tough to forecast — because people will always need food, housing, and other products for daily living, even during recessions.

Frequently Asked Questions (FAQs)

What is the federal funds rate?

The rate that banks charge one another for overnight loans is known as the federal funds rate. This rate helps determine short-term market rates and the interest rates that borrowers will pay on mortgages, car loans, credit cards, and so forth.  

Why do rising interest rates depress stock prices?

As interest rates rise, it creates a ripple effect throughout the entire economy. It impacts stock prices because the cost to lend increases, driving down business growth and expansion.

Interest rate increases also drive investors toward investments that have the lowest interest rates and guarantee returns, in turn reducing demand for stocks and pushing the price down.

Should I invest in bonds when interest rates rise?

Bonds act quite similarly to stocks in a rising interest rate environment. As the rates rise, bond prices tend to drop, which is why many investors rush to buy short or intermediate-term bonds as they expect rates to continue to rise on long-term bonds. Treasury inflation-protected securities (TIPS) are another good choice for a bond investment as interest rates are on the rise.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.