As the Fed recently raised the interest rates and provided guidance for 3 hikes during this year, most investors have started wondering how the rising interest rates will affect each component of their portfolios. In addition, the SA editor Rebecca Corvino recently initiated a conversation on this subject. Therefore, in this article, I will analyze the impact of higher interest rates on the various categories of securities.
Stocks
As stocks compete directly with bonds in terms of yield, most stocks will be negatively affected by rising interest rates. More specifically, the stock prices will have to drop so that their expected returns remain slightly above the expected returns of bonds. The only stocks that are likely to benefit from higher rates are the financial stocks. Banks will reap the benefits from a wider spread between their lending and borrowing rates while insurance companies will be able to invest their float…