MPower: 3 Strategies For A High Interest Rate Environment
August CPI numbers are in, and it’s not pretty. At all…
Analysts expected to see a drop in prices from August’s CPI report, due in part to gas prices falling, but instead of the 8.1% the market had been expecting, 8.3% was the actual figure. This sent the S&P 500 into a massive, 1,200-point tailspin and affirmed that these price increases may be stickier than expected.
The market’s violent reaction also suggests the “pain” Fed Chair Powell recently referred to, may be just beginning.
In order to tame this rise in consumer prices, the Fed will likely need to hold true to its promise to be aggressive toward inflation. This means more rate hikes are inevitable. The only unknown at this point is how many we’ll get and how big they will be.
However, given what we do know (based on what the Fed has told us), we can act in order to lessen the sting of rising prices, as well as rising rates.
In past issues, we have discussed the ideas of being adaptable with your investment strategy, how to use economic conditions as a sort of weathervane, and even how to invest in times of higher rates. Given that CPI reports are top of mind for the market, as evidenced by the market’s reaction to the latest print, I felt it prudent to revisit the approach to investing when rates are rising. For that, we can turn to Magnifi to see what type of approach we might want to take.
As you can see, apart from the lone industrial stock, Magnifi was able to return a handful of ETFs that would let us take on a variety of strategies to approach this high interest rate environment. With talk of a possible 100-basis point hike, now might just be the time to start looking for these types of investments.
Let’s quickly review some of the choices we have. One popular strategy for when interest rates are rising is investing in banks or brokerage firms (something we’ve touched on before).
The reason is that banks and brokerage firms both make money from charging interest. When rates go up, so do the profits they generate from interest (provided their margin isn’t also affected). These stocks also often pay dividends, which helps support their stock prices and puts some extra cash in the shareholder’s pocket. Magnifi’s suggestion Direxion Daily Regional Banks Bull 3X Shares (DPST) is an ETF that holds a number of stocks that fit this strategy perfectly.
Another option, of course, is to short the market…
Market fundamentals don’t point to many positive developments on the horizon. Sentiment is overwhelmingly bearish again, and there’s speculation Powell may even announce a 100-basis point hike – the largest rate hike in 40 years – at next week’s Fed meeting. If you’re thinking there’s probably more downside in the market, you’re probably right. Just look at the aftermath of previous rate hikes from this year and you’ll see that history may yet again repeat itself.
But there’s also a third strategy to consider in a rising rate environment — one that many investors may overlook, but Magnifi pinpointed for us. And that’s buying ETFs that short U.S. Treasuries. You see, when interest rates rise, bond prices fall to adjust to the higher rates. The short ETFs Magnifi pulled for us – TTT and TBT – allow you to do just that.
Check out what other strategies you can come up with and let Magnifi allow you to act on them, and take command of your financial future.
Today’s feature: Investing for Rising Interest Rates