{"id":9399,"date":"2021-03-15T14:15:53","date_gmt":"2021-03-15T14:15:53","guid":{"rendered":"https:\/\/zackspcg.com\/blog\/?p=9399"},"modified":"2022-02-26T13:05:52","modified_gmt":"2022-02-26T13:05:52","slug":"rising-interest-rates-4-takeaways-for-investors","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/rising-interest-rates-4-takeaways-for-investors\/","title":{"rendered":"Rising Interest Rates: 4 Takeaways For Investors"},"content":{"rendered":"\n<p>U.S. Treasury bonds have been locked in a six-week selloff,\nwith yields moving steadily higher as prices fall. The 10-year U.S. Treasury bond\nyield started 2021 under 1%, but it has marched upwards ever since. The yield\ncrossed 1.5% by the first week in March.<sup>1<\/sup> Looking ahead, all signs\npoint to even more upward pressure on long-dated U.S. Treasury bond yields this\nyear. As you can see from the chart below, the 5-, 10-, and 30-year U.S.\nTreasury bond yields have all been drifting higher since last summer. <\/p>\n\n\n\n<p><strong>The 5-, 10-, and\n30-year U.S. Treasury Bond Yields (March 2020 \u2013 March 2021)<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/02\/9_pic1-1-1024x395.png\" alt=\"\" class=\"wp-image-9400\"\/><figcaption> <strong><em>Source: Federal Reserve Bank of St. Louis<sup>2<\/sup><\/em><\/strong> <\/figcaption><\/figure>\n\n\n\n<p>__________________________________________________________________________<\/p>\n\n\n\n<p><strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2021_03_15&amp;content=stock_market_outlook_report\">Prepare Your Investments for Inflation, Volatility and Other Uncertainties<\/a><\/strong><\/p>\n\n\n\n<p>With anticipation surrounding the next stimulus, expected\neconomic growth and inflation expectations, there are many unknows surrounding\nthe market. As we witness market changes, I understand how planning your future\neconomic situation can cause lots of uncertainty. Instead of making sudden and\nemotional investment decisions, I recommend focusing more on the hard data and\neconomic indicators that could impact your investments in the long-term!<\/p>\n\n\n\n<p>To help you do this, I am offering all readers our just-released\nStock Market Outlook report. This report contains some of our key forecasts to\nconsider such as:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><em>Financial\nstability lessons from the COVID-19<\/em><\/li><li><em>Setting\nU.S. returns expectations for 2021<\/em><\/li><li><em>Outlooks\nfor the underlying U.S. and Global Economies<\/em><\/li><li><em>S&amp;P\n500 earnings growth<\/em><\/li><li><em>What\nproduces 2021 optimism?&nbsp; <\/em><\/li><li><em>Is\nit time to buy U.S. stocks?<\/em><\/li><li><em>Update\non U.S. fiscal stimulus<\/em><\/li><li><em>And\nmuch more\u2026<\/em><\/li><\/ul>\n\n\n\n<p>If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!&nbsp;<br> <strong><br>IT\u2019S FREE.&nbsp;<a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2021_03_15&amp;content=stock_market_outlook_report\">Download the Just-Released April 2021 Stock Market Outlook<\/a><sup>3<\/sup><\/strong><\/p>\n\n\n\n<p>The conditions that generally lead to rising rates all apply\nto the current environment, in my view:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Anticipation of large fiscal stimulus passing in\nthe near-term;<\/li><li>Accelerating economic growth expected in coming\nquarters (and perhaps years);<\/li><li>Rising inflation expectations.<\/li><\/ul>\n\n\n\n<p>I\u2019ll stop short of making any predictions about where the\n10- or 30-year U.S. Treasury bond might finish the year. But from what I see\ntoday, the outlook is clear: longer-term interest rates are on the rise, and there\nare four key takeaways I think investors should consider. Here they are.<sup>4<\/sup><\/p>\n\n\n\n<p><strong>Takeaway<\/strong> <strong>#1: High-Growth, High Valuation Stocks are\nRiskier<\/strong><\/p>\n\n\n\n<p>Many readers have probably seen the stories in the financial\nheadlines: rising interest rates are putting pressure on technology stocks.\nIndeed, the tech-heavy Nasdaq entered correction territory last week, while the\nS&amp;P 500 has fallen by only a modest amount over the same period. The\nquestion is, why do higher rates hurt tech stocks?<\/p>\n\n\n\n<p>Here\u2019s the simplest answer I can offer: when interest rates\nare very low, liquidity in the capital markets tends to flow into risk assets.\nInvestors in search of yield know they can\u2019t find any in U.S. Treasuries and\nmost types of bonds, so they buy stocks. Since interest rates have been low for\na long time, investors have been comfortable investing in high-growth\/high-risk\ntech names, bidding up prices in the process.<\/p>\n\n\n\n<p>However, as interest rates start to tick higher, stocks\ncease to be \u201cthe only game in town.\u201d This means all the excess liquidity now\nhas more places it can go, which diminishes the relative attractiveness of\nstocks, but <em>especially<\/em> the most expensive\nstocks. This does not necessarily imply that a tech bubble is about to burst \u2013\nbut it does mean the market may take some to adjust to higher rates, which\ncould mean elevated volatility for high valuation names. Check your portfolio\nfor exposure. <\/p>\n\n\n\n<p><strong>Takeaway #2: A Better\nProfit Outlook for Financials<\/strong><\/p>\n\n\n\n<p>Steep, upward sloping yield curves tend to be good news for\nbanks, and the yield curve is currently getting steeper. <\/p>\n\n\n\n<p>The chart below shows the 10-year U.S. Treasury bond yield\nminus the 3-month Treasury bond yield, which is a good barometer for the yield\ncurve. When the line moves higher, the curve gets steeper:<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/02\/5_pic2-1024x395.png\" alt=\"\" class=\"wp-image-9401\"\/><figcaption> <strong><em>Source: Federal Reserve Bank of St. Louis<sup>5<\/sup><\/em><\/strong> <\/figcaption><\/figure>\n\n\n\n<p>Steep yield curves are good for banks because of net\ninterest margins on loans. When a bank makes a loan, it generally accesses\ncapital at rates on the short end of the curve (basically free money currently)\nand loans the money out at longer-term rates. The steeper the yield curve, the\nbigger the difference between short and long rates, which also means bigger\nbank profits. The Financials sector has a favorable outlook as a result. <\/p>\n\n\n\n<p><strong>Takeaway #3: Capital\nMay Rotate from Growth to Value<\/strong><\/p>\n\n\n\n<p>Over the last 10 years (through 2020), the Russell 1000\nGrowth Index has delivered an annualized return of around +17%, while the\nRussell 1000 Value Index has annualized about +10% over the same period. Since\n2007, the outperformance of growth relative to value is approaching levels not\nseen since the 1930s and the dot com bubble. In fact, the spread between the\nprice-to-earnings (P\/E) ratio on growth and the P\/E ratio on value stocks is\nthe highest it has been since 2000, when the bubble burst on many growth names.\nAs I mentioned before, I\u2019m not suggesting we\u2019ll see a tech bubble burst in\n2021, but I do believe it is just matter of time before investors rotate\ncapital away from growth and towards value. Rising interest rates may nudge\nthis rotation along.<sup>6<\/sup><\/p>\n\n\n\n<p>I\u2019ve already made the case for rising interest rates hurting\ntech stocks, which also means hurting the growth category. But rising inflation\nexpectations play a role here too \u2013 upward pressure on inflation may eventually\nput some pressure on the Federal Reserve to tighten monetary policy, which\nrecent history suggests could give way to market volatility and \u201ctaper\ntantrums.\u201d As mentioned, selling pressure in response to higher inflation and\ntighter monetary policy will most likely impact areas of the market with\nrelatively high P\/E ratios. This could mean a reality check for growth stocks and\ncould trigger an investor rotation into value.<\/p>\n\n\n\n<p><strong>Takeaway #4:\nRethinking Retirement Fixed Income Allocations<\/strong><\/p>\n\n\n\n<p>I do not like making long-term forecasts for interest rates\nor the stock market. Anything can happen from year to year, so it\u2019s important\nto assess as you go. It\u2019s clear to me, however, that the outlook for risk-free\nfixed income, i.e. Treasuries, is looking bleak for current and future\nretirees. The bull market in Treasuries (from 1980 to recent years) is running\nout of steam, and investors will need to content with low yields that look\npoised to move higher. Remember, rising yields means falling prices. <\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/02\/2_pic3-1024x395.png\" alt=\"\" class=\"wp-image-9402\"\/><figcaption> <strong><em>Source: Federal Reserve Bank of St. Louis<sup>7<\/sup><\/em><\/strong> <\/figcaption><\/figure>\n\n\n\n<p>I think current and future retirees need to rethink fixed\nincome allocations in retirement portfolios, exploring different types of bonds\nlike corporates and municipals, and also exploring income-generation via other\navenues, like dividend stocks and preferred. <\/p>\n\n\n\n<p><strong>Bottom Line for Investors<\/strong><\/p>\n\n\n\n<p>As you can\nsee from this lengthy column, rising interest rates have many implications for\ninvestors. In my view, now is a good time to take a closer look at your\nportfolio allocation, and to potentially make a few adjustments if your goals\nand risk tolerance allow. If you want some help conducting your portfolio\nreview, reach out to us today. We\u2019d be happy to help.<\/p>\n\n\n\n<p>In addition to taking a close look at your portfolio, in times like these, it is important to stay focused on key data points and economic indicators that could positively impact your investments in the future. To guide you, I am offering all readers our&nbsp;<strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2021_03_15&amp;content=stock_market_outlook_report\">Just-Released April 2021 Stock Market Outlook Report.&nbsp;<\/a><\/strong><\/p>\n\n\n\n<p>This report looks at several factors that are producing optimism right now and contains some of our key forecasts to consider such as:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><em>Financial\nstability lessons from the COVID-19<\/em><\/li><li><em>Setting\nU.S. returns expectations for 2021<\/em><\/li><li><em>Outlooks\nfor the underlying U.S. and Global Economies<\/em><\/li><li><em>S&amp;P\n500 earnings growth<\/em><\/li><li><em>What\nproduces 2021 optimism?&nbsp; <\/em><\/li><li><em>Is\nit time to buy U.S. stocks?<\/em><\/li><li><em>Update\non U.S. fiscal stimulus<\/em><\/li><li><em>And\nmuch more\u2026<\/em><\/li><\/ul>\n\n\n\n<p>If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!<br><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Mitch looks at 4 key implications of rising interest rates for investors  <\/p>\n","protected":false},"author":3,"featured_media":8874,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71,1],"tags":[],"class_list":["post-9399","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets","category-private-client-group","category-uncategorized"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9399","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=9399"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9399\/revisions"}],"predecessor-version":[{"id":10435,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9399\/revisions\/10435"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=9399"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=9399"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=9399"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}