Best Stocks and Sectors for Rising Interest Rates

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What are the best investments when interest rates are rising? Market timing is tricky at any point in time. However, there are some smart moves you can make to invest in the best stock funds and sectors in a rising interest rate environment.

When interest rates are at or near historical lows, a wise move is to prepare for the rates to rise. This is often followed by a final move upward for stocks before a decline (bear market) ensues. The economy may be fairly healthy when rates begin rising, but rising rates signal the start of the end of an economic cycle.

A balanced approach when interest rates are rising is to stay invested and take advantage of late-stage positive momentum. But you should also prepare for harder times that are lurking around the corner. Take a look at the best stock funds and stock sectors for rising interest rates.

Best Stock Funds for Rising Interest Rates

If you choose to invest in mutual funds when rates are rising, you have to know which mutual fund categories can work for you.

One such type is growth stock funds. These mutual funds are focused on growth stocks. These are stocks with strong projected growth and attractive return on your equity. The best time to invest in growth stocks is most often when times are good, during the latter (mature) stages of an economic cycle.

Times of rapid growth often occur at the same time as rising interest rates. Momentum investing takes advantage of this. For instance, in 2007, the economy was growing fast, and most market indexes had reached all-time highs. It was at this time that growth stocks dominated across all capitalization—large-cap stocks, mid-cap stocks, and small-cap stocks. Note that 2007 was the year prior to The Great Recession of 2008, which ended the cycle.

Warning

Keep in mind that growth stocks and growth stock mutual funds often see bigger declines than the broader market once a bear market correction begins.

Best Stock Sectors for Rising Interest Rates

When interest rates are on the rise, the economy is typically nearing a peak. This is because the Federal Reserve raises rates when the economy appears to be growing too fast. Thus, inflation becomes a concern.

Those who aim to time the market with sectors will have the goal of catching positive returns on the upside. At the same time, they'll want to prepare for harder declines when the market turns down.

You may want to consider sectors that tend to perform best (or fall in price the least) when the market takes a downward turn. These can be considered defensive investment types:

  • Consumer staples (non-cyclicals): Consumer discretionary (cyclical) stocks will typically perform best during the peak times of the economic cycle and during the early stages of rising interest rates. But non-cyclical or defensive stocks are more suitable before a recession hits, which is difficult to forecast. People still need housing, food, heating, cooling, education, and other products for daily living, even during a recession.
  • Healthcare: Just like staples, people still need to buy their medicine and go to the doctor in both good times and bad. Health sector mutual funds and ETFs can be smart holdings when rates are rising.
  • Gold: When traders expect an economic slowdown, they tend to move into funds that invest in real, physical asset types. These may include assets such as gold funds and ETFs. Gold is not a sector, but it is an asset that can do well in uncertain times and falling markets.

The chart below shows the gold fixing price per troy ounce from 2000 through today.

The Bottom Line

Even though you are striving to make smart purchases, you must still use caution. Be aware that market timing is not a good idea for most investors. However, you can still use some of these ideas when constructing your portfolio to help you diversify.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor, and it might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.