How to invest during the Fed’s plan to raise interest rates and beat inflation (2024)

Consider bonds

Rising interest rates certain assets, such as bonds, more attractive to investors. “In this environment, investors can own a portfolio of high quality bonds with moderate duration to generate income as well as potentially offset equity risk,” explained CarlLudwigson, Managing Director at Bel Air Investment Advisors. “If the US slips into recession, both inflation and interest rates are likely to fall which is generally good for fixed rate bonds.”

For investors looking to see returns from treasury securities in the short term, treasury bills are a good option while interest rates are high. “For the first time in a long time, people can get yield very short term securities,” explained Jamie Cox, Managing Partner for Harris Financial Group. “Folks who are looking for short term places to park money outside of a bank have sought the refuge of treasury bills, where you can get a three to six month bill with an interest rate of 4.6% to 4.8%,” he added. (You can read more of our coverage on bond investing here.)

Weight value stocks over growth

When interest rates are high and the economy shows signs of heading into a recession, stocks with solid fundamentals will likely do better than growth stocks, which tend to thrive in bull markets. “Growth stocks depend on the future and the need to borrow more money at higher rates to get future returns,” explained Mark Neuman, Chief Investment Officer of Constrained Capital. “Value stocks tend to be better immediate cash flow generators that can take advantage of money earned now versus in the future,” he added.

Specifically, financials are a sector that do particularly well because they’re in the business of distributing capital and directly benefit from rising interest rates. “When interest rates are going to be higher for longer, where you want to invest is largely going to be value oriented assets such as banks, financials, credit card companies, or insurance companies,” said Cox. “These are all places where you can make enormous amounts of money because they are the the allocators of money into the economy,” he said.

Focus on dividend paying stocks

Another good asset to own while rates are dividend paying stocks. Companies such as consumer staples and healthcare tend to still be profitable in an environment with rising rates.“Consider dividend paying stocks that have the capacity to increase their yield,” explained Cox. “That’s a really good place to invest your money when interest rates are rising, because as interest rates rise, so will dividend yield,” he said. “Dividend paying stocks may do better as the higher income profile can compete with higher interest rates offered at banks, for example,” explained Neuman.

Look for opportunities internationally

Now is also the time for investors to expand their portfolio to emerging markets and other international sectors. “As interest rates have risen in the United States faster than around the world, it has created a differential in currency and and that made companies with large dollar based businesses or US-based businesses more attractive,” explained Cox. He noted that pharmaceuticals is one sector that has particularly benefited from the currency deferential, as companies like Pfizer have huge markets internationally but are US-based so use the dollar.

“Consider a Japanese company earning stronger dollars (because of higher interest rates) and then repatriating to Yen which has weakened, i.e. they get more Yen with each dollar when they report earnings. That said, a lot of this could depend on where actual product manufacturing takes place,” Neuman explained.