Current Thinking

Gauging the Impact of a Fed Rate Hike on Stocks

A blog by Frederic Slade, CFA, Assistant Vice President and Senior Director, Investments, Pentegra Retirement Services – September 20,2016

The Federal Reserve has been sending mixed signals as to the probability of an interest rate increase in September. The bond futures market is currently forecasting a 32% chance of a Fed rate hike in September but a 60.3% chance of a rate hike in December.

What happens to stock investors if there is a rate increase? It is likely that if there is a one-time rate increase that is expected by the markets, there should be little impact on the stock market, as the increase will have been already priced in. However, if rate increases are sudden or greater than anticipated, there could be meaningful impacts on certain sectors of the stock market. Historical patterns suggest some sectors may outperform or underperform in such an event, though the introduction of factors such as oil prices and foreign demand may make these impacts harder to determine.

One sector which may benefit from a rate rise is Financials, since banks’ net interest margins (income on loans less income credited on deposits) would be likely to increase. If the rate rise is a signal of a strong economy, Consumer Discretionary and Technology sectors may also do well, though the strong dollar may diminish the gain of global companies by reducing export growth. Sectors which may be hurt by an interest rate increase are Utilities and Real Estate Investment Trusts (REITs). Investors treat these sectors like bonds, whose value declines when rates rise.

NOTE: Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. Past performance is not a guarantee of future results.

About the Author

Frederic Slade

Frederic Slade is Assistant Vice President and Senior Director, Investments at Pentegra Retirement Services. He joined Pentegra in May 2007 as a Senior Analyst in the Investment Department and became Director-Investments in January 2013. He is responsible for managing over $1 billion in internal bond portfolios and providing asset/liability studies, analytics and product strategy for Pentegra’s Defined Benefit and Defined Contribution Plans. Mr. Slade is also a frequent contributor of economic and financial market blogs to Pentegra’s Talk to a Specialist website and the financial media. Prior to joining Pentegra, Mr. Slade was a Senior Quantitative Analyst at Citigroup Asset Management, providing asset allocation and quantitative stock screening for mutual fund products. Prior to Mr. Slade’s tenure at Citigroup, he was an Investment Manager at NYNEX Asset Management (now Verizon). At Verizon, Mr. Slade was responsible for asset allocation and planning for its $15 billion Defined Benefit pension fund. Mr. Slade holds a Ph.D. in Economics from the University of Pennsylvania and a CFA, and is a frequent presenter at industry seminars and conferences.


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