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.