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Stock concerns as interest rates rise

When interest rates eventually rise, stock investors can expect ripple effects in certain parts of their portfolios. Kyle Tetting explains in a Money Talk Video interview with Joel Dresang.

Joel Dresang: Kyle, interest rates are at record lows. We expect them to rise eventually. We’ve talked about what that means to fixed-income investors. What about the stock side of people’s portfolios? Are there some stocks that profit from that more than others?

Kyle Tetting: Generally speaking, an improving economic condition is what ultimately drives the Federal Reserve to raise interest rates. So that’s what we would expect. And certainly there are some areas that benefit from that.

In particular, if you look at financials, for example. They benefit as the economy improves because there’s more people looking for loans, looking to buy cars, looking to buy houses, looking to buy some of those other big-ticket items that you really need to borrow for.

We’re seeing a lot more middle-income families reaching up to maybe that higher-priced handbag instead of that discount handbag, reaching up to that luxury car instead of maybe that mid-level sedan. And so, consumer discretionary stocks, those things you wouldn’t necessarily purchase, but which now you can feel more comfortable purchasing, tend to benefit as well, as the economy improves.

Joel: What about industrials?

Kyle: The industrials are the ones who ultimately are making all these goods. And so, more purchases, because of an improving economy, tends to be good for the industrials as well.

So really, there is a couple of areas like that that just are going to have some significant benefits from that improving economic environment.

Joel: What about are there sectors of stocks that won’t do as well?

Kyle: Yeah. There certainly are. One of the big things for a lot of investors has been this reach for yield. I would much rather have a stock that pays a 2½% or 3% dividend with the potential to appreciate than a bond that’s going to pay you maybe the same, maybe a little bit less, but which you know can’t appreciate very much.

So what we’re going to see as rates rise is that dividend yield looks a little bit less attractive. You may see investors start to leave things like utilities and telecoms, which are really big dividend players.

Joel: What about consumer staples?

Kyle: Consumer staples are one of those things that you’ve got to buy no matter what. You go to the grocery store. You buy the soap. You buy the shampoo. You’re buying food. So when things aren’t going well, those are the kinds of stocks that tend to get bid up because demand isn’t going to slow drastically.

As we see more money moving into the consumer discretionary stuff, those big-ticket purchases, it tends to come out of areas like consumer staples because people aren’t feeling as bad about the economy.

Joel: So, I’m an investor with a well-balanced diversified portfolio. Do I expect to make many changes as interest rates rise?

Kyle: For our investors, that’s what we’re really hoping for is that balanced portfolio. But there are ways that we can lean into some of these things. Overweighting as opposed to allocating entirely to things like financials, industrials and those consumer discretionary. And that’s something that we look for the opportunity to do with every conversation we have with clients and with every investment opportunity that we look at.

Joel: And, again, we expect interest rates to go up, but not necessarily soon and not necessarily fast.

Kyle: Yeah. Certainly, we have been at record low interest rates for some time. The economy has improved slowly, and it has improved significantly from where we were. But there’s still quite a bit of improvement to go.

And before we see rising interest rates, it’s likely that the Fed is going to have to have some inflation on the horizon. We don’t see that right now.

So there should be some time here to get accounts repositioned for these things.

Kyle Tetting is research director at Landaas & Company.

Joel Dresang is vice president-communications at Landaas & Company.

Money Talk Video by Peter May
(initially posted Dec. 19, 2014)

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