What Does An Interest Rate Hike Mean For Stocks?

It’s inevitable. The Fed will raise rates at some point… probably within the next year.

At the moment, the money appears to be on a September/October move, instead of June (which many previously predicted). But the Fed’s June meeting is still 2 1/2 months away, and anything can happen.

For many investors, though, a dark cloud is looming. A single question keeps them up at night: What does a rate hike mean for the markets?

To answer this, I went back and looked at the best-performing sectors prior to the Fed lifting rates… and the best sectors following rate hikes.

The results are interesting…

What’s Best to Own (In Good Times and Bad)

Historically, one of the best sectors to own right before the Fed raises rates is technology. This is especially evident when you look at the tech-heavy Nasdaq.

nasdaq vs dow sp chart

In fact, right now the Nasdaq is on a nearly unprecedented streak of ending nine consecutive quarters in positive territory.

Looking at the six months before the last four rate increases, the best-performing sectors have typically been Energy, followed by Materials, Industrials and Information Technology. Utilities and Telecoms were the worst performers. top performers six months before rate hike chart

Now, in the six months following a rate increase, a completely different picture forms… top performers six months after rate hike chart

Energy, Healthcare, Consumer Staples, Financials and Materials all struggle. But Information Technology picks up pace, gaining an average of 16.12%.

The second-best performer is Telecom, followed by Utilities and Consumer Discretionary

The fact that utilities performed well was surprising. I thought it might have to do with the time of year the rate increases took place. But when we look a year out from the rate increase, we get a picture everyone should be happy with… top performers one year after rate hike chart

Telecoms are the worst-performing sector, not really gaining much from the six-month mark. But everything is in the green. In fact, a year after a rate hike, the gain from Information Technology is nearly twice what it was at the six-month mark, while Utilities, Industrials and Energy absolutely surge.

So, in terms of stocks, no sector should get destroyed after the Fed raises rates. At least, not based on the past four times it’s happened.

A Difficult Start

Obviously it’s been a rocky year…

The S&P 500 barely broke positive for the first quarter, while the Dow Jones Industrial Average ended the first three months of 2015 in the red.

But don’t get discouraged. Besides the fact that the S&P – like the Nasdaq – has a streak of nine consecutive quarters of positive gains, there are sectors providing returns.

Maybe even more so if the Fed acts this year. Individual sp sectors year to date chart

And even though there’s a lot of concern about the Fed raising rates this year and what impact that might have, it’s technically a good thing…

It means the economy is improving and can manage on its own.

Good investing,

Matt

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