Inflation, interest rates, and how we profit from it?
On the 15th, Jerome Powell, Chairman of the Federal Reserve, announced his next steps to combat inflation:
- Doubling the pace of monthly purchase reductions from $15 billion to $30 billion per month: Purchases are currently at $120 billion per month, meaning market support will end in March 2022.
- 3 interest rate hikes in 2022 and another 3 in 2023, which will lead to a 'comfortable' interest rate of 2% in 2024.
- Setting an inflation target of 2.6% in 2022. (compared to 6.8% currently)
Clarification: When interest rates in the economy are high, investors flock to solid investment channels away from the stock market.
When inflation is high, citizens consume fewer consumer goods due to their increased cost relative to the currency.
Amidst the negative news for the stock market, there are several bright spots that caused the market to react with gains:
1. The Fed's plan was expected, and with its announcement, uncertainty ended.
2. The market had already priced in the panic and declines of the past month.
3. 6 gradual interest rate hikes, not one 'painful' one, only after the completion of purchases – at the end of March 2022.
Despite the gains: The market, of course, needs a few days to digest the data and choose a direction for the last week of the year and the near term.
The markets – what do we need to know?
Stock and crypto markets: In a high-interest rate environment, these markets may be perceived by some investors as 'unattractive' in terms of risk, which will lead to money flowing out of them into other investment channels.
Bond market: Historically, there is a correlation between interest rate hikes and a positive reaction from US bonds.
Forex market: Raising interest rates on a currency makes it more attractive to investors.
Additionally, weakening inflation will benefit the purchasing power of government currencies.
Sectors and stocks – who will benefit and who will lose from the interest rate hike?
The financial sector – the main beneficiary of rising interest rates: The rising interest rates (on deposits, but also on loans, mortgages, and insurance) will go directly into the pockets of financial companies, and therefore, most of the focus will be on bank stocks, loans, insurance companies, and mortgages.
Retail and consumer companies also benefit in a high-interest rate environment: Defensive companies show better performance with rising interest rates and falling inflation due to changes in the consumer market.
Additionally, investing in real estate and commodities (gold in particular) can be another investment channel for the benefiting sectors due to increased demand after interest rate hikes.
Stocks and ETFs I will focus on: Banks – JPM, BAC. Credit and loans – V, MA. Insurance companies – CB, MET, MMC. Retail – WMT, PG, HD. Consumer – PEP, MCD, NKE, BKNG. Retail + Consumer ETF – XLP. Gold (tracking ETFs) – GLD, AIU.
- Nothing stated herein constitutes a recommendation -